When you think 'success', think 'succession'

30 March 2007

by Shaun Sandiford

Adopting Wrap can transform the value of your business, but your choice of provider will be key to good succession planning, says Shaun Sandiford

Building a successful business is not easy and, unless you are a teenage Internet billionaire, will usually have taken you years of concentrated effort to achieve. So it's only natural that all business builders like to think that their firms will live on after them, whether in the hands of their children, friends or business partners.

In most respects, Financial Advisers are no different, and, once your business is firmly established, planning the succession tends to become an increasing priority. And the reasons are not just sentimental, there is also the need to turn those years of effort into cash and security for yourself and your dependants.

Where Financial Advisers do differ from most others is in the way their businesses are valued. With most firms still mainly reliant on income from initial commissions on sales, few have any significant inherent value; unlike the local butcher or chemist, location is not a selling point and goodwill is worth little, if anything: all they really have to offer is a client base which is actually no more than a stock of raw material that has already been well re-used, to say the least. No, a successful Financial Adviser is akin to the celebrity chef patron of a restaurant, without whom it will be just another restaurant, with no reputation, and the new owner will have it all to do from scratch.

Fortunately, things are now changing, at least for Financial Advisers who have begun the transition to Wrap-based business. By moving to Wraps, they are exchanging dependence on new sales commissions for an ongoing stream of trail commissions and/or fees derived from servicing and advising their clients. That stream of income will have a value that can be properly assessed on the basis of hard records, so these businesses will not only be worth more intrinsically, but financing their purchase will be an easier and more practicable proposition, particularly for management buy outs or children wishing to take over a family firm.

However, 'Wrap' is still used as a generic term for a gamut of widely-differing propositions and your choice of Wrap platform will have a significant bearing on both the level of service you are able to offer and deliver to clients, and the degree to which you are able to build up the value of your business.

In order to maximise both the benefits to your clients and the succession prospects for your business, true open-architecture Wrap is a must, and nothing less will do. From a client benefit point of view, the limitations of the supermarket platforms are fairly obvious, fund choice is restricted to their internal fund catalogues, and the need to pick and mix tax wrappers largely negates the simplicity of Wrap and replaces transparency of charging with complexity, if not downright opacity. But from the perspective of maximising the value of your business, they cannot provide the clear historical analysis of trail commission which is essential to an accurate (and therefore favourable) valuation.

However, if you choose a Wrap with true open-architecture, it will not only allow you full control of your remuneration but also has the facility to show its history, month by month and client by client, at the touch of a button. That means better valuation, easier financing of a buy-out, or simple collation of renewals should you wish to retire and remain a sleeping partner.

Getting your succession planning right can also help make your business even more successful in the meantime. Financial Advisers consistently identify their main problem as the inability to recruit, train and retain first class 'para-planners'. Hardly surprising, if the first thing they discover on joining is that their new employer plans to sell up in a few years, to the local big firm, that they don't want to work for and may already have turned down. But they would be really motivated if, instead, you were able to say that you were committed to remaining independent, and would be putting together a properly structured buyout scheme to enable them to take it over in a few years' time.

Even though it will be run by my successors, 'Shaun Sandiford & Sons Wealth Management' will still have a nice, solid ring to, especially when heard from my Caribbean hideaway.