IFAs looking to sell their business before the Retail Distribution Review (RDR) comes into effect, may see the value of the firm negatively impacted, if steps are not taken towards making the business model compliant.
By 2012, firms will have to be RDR-compliant and move away from provider commission to a structure where the IFA firm receives a regular annual income.
This means either working on an asset under management fee model, where annual charges are made based on the amount of money IFAs manage for clients, or charging hourly rates, or a combination of the two.
On top of this, advisers will have to ramp up their qualifications to at least QCA level 4.
However, many advisers have signalled their intention to leave the industry rather than meet the RDR proposals. (See article.)
Consolidation of the IFA sector is a widely expected outcome of the RDR, with Ernst & Young predicting the number of IFA firms to decline by 10,000 just one year after RDR implementation. (See article.)
According to Richard Clarke, corporate finance partner in Financial Services at KPMG, who has advised on more than 30 consolidation deals in the IFA sector, the move towards recurring income stream models will be a costly one.
This is because, if action is not taken to become, in some way, RDR compliant, this will have a negative impact on the value of an IFA firm, Clarke warned.
“If you make those changes, in theory you will have a more robust business model. If you carry on and don’t do anything, the problem is the closer you get to the deadline arguably the less value your business has.”
From a consolidation perspective, Clarke said firms seeking acquisitions in the IFA sector, would look to buy businesses that are “either RDR compliant or which they believe they can make RDR compliant”.
But he also said the transition to the RDR would affect IFA profitability at least in the short-term.
“The move to recurring income streams will depress profitability over the transition period and will put big cash flow strains on the business.
“Mirror that with the capital adequacy changes and that’s a further amount of cash that the business needs to find.
“Then you add the cost of exam qualifications and the time cost to do them and that’s a strain on the business and will cause a problem for many IFAs, and that strain will be particularly exacerbated the smaller you are.”
Skandia head of proposition marketing Peter Jordan agreed that the transition would be a financially difficult one for many IFAs and said it could even take years for some businesses to break-even.
“It will take time to build to the level that you were operating at previously from an income point of view.
“There is a transition that businesses have to go through, depending on your terms of business beforehand and working under the new model you could be talking about a break-even point of maybe even seven years.
“It’s quite a challenge, but the RDR doesn’t come into effect until 2012, so in the meantime advisers can start making the transition and manage the financial shock of the transition,” he said.
Source: FT Adviser
Huntswood