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Succession Planning For IFA Businesses

It is fair to say that the landscape has changed for professional advisers in recent years, none more so than for IFA businesses.

Since 2012, we have seen the Retail Distribution Review radically overhaul the way traditional IFA services are provided and paid for. There has been a wave of consolidation in the sector which shows no signs of slowing down as well as a gradual but steady change in the demographics of the profession. Many advisers have opted for retirement, with younger advisers obtaining chartered status.

But the changes have not stopped there. MIFID II and GDPR have brought with them further demands in terms of compliance, added to which, the cost of professional indemnity insurance is also on the rise. This is due to a spotlight being thrown on perceived risk areas such as defined benefit pension transfers.

All professional firms are now having to invest in their IT infrastructure simply to keep up. Artificial intelligence (AI) looms large for professional services firms and those that do not invest in and embrace this AI will surely fall by the wayside.

Against this challenging backdrop, what is the future for IFA businesses both in terms of survival and ambition?

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The obvious solution for many firms in the last five years has been found in consolidation. The move towards advisory-based charging models post-RDR created an opportunity for IFA businesses by enhancing their key assets – funds under management and the re-occurring income derived from them.

Financial planning firms, including Succession Wealth and AFH, have been in a race to acquire funds under management through multiple acquisitions of IFA businesses. Larger acquirers give smaller firms the chance to be part of something bigger, offering a greater range of services and expertise and ambitious growth plans.

Whilst the benefits of acquisition are clear for consolidators, they have also solved many difficulties by taking the problems outlined above off the hands of smaller IFA businesses whilst enabling their owners to realise full value in what they have built up. During this period, favourable tax treatment has been available for many IFA business owners in the form of entrepreneur’s relief. The pace of consolidation shows no signs of slowing down in 2020 and we can expect to see many more IFA businesses opt to go down this route.

What Other Options Are There?

Selling to a consolidator is a well-trodden path, but what other options are there for IFA businesses in terms of long term planning? I have acted for many owners of IFA businesses and almost invariably their main concern is to protect the interests of their clients and staff. Therefore, it is critical to select a long term plan to suit these businesses and their stakeholders.

Business owners may look towards succession planning from within their own firm. There are some difficulties here as an adviser will need to demonstrate the appetite and ability to run their own firm and to meet the inevitable challenges – as set out above. Coupled with this is the need to raise finance. Many younger advisers (many of whom will be facing the dual pressures of raising families and paying mortgages) will find it, at the very least, challenging to raise the capital to buy out the current owners. That is not to say it is impossible – we have seen lenders willing to lend against cash flow projections based on historic trading performance and opportunities are there for younger advisers who are looking to acquire their own client books.

The traditional model of IFA businesses engaging their advisers on a self-employed basis is under threat with increasing HMRC scrutiny in respect of employee status.

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