When should I sell my Brokerage?Current environment considerations

I use the term Brokerage in lieu of all other identities such as practice, wealth management firm etc. firstly, the comments I make here are applicable to all.

The past two weeks of uncertainty in Executive Pensions have caused several Brokerages I know to rightly get concerned over the future distribution model of the Brokerage industry. Some are asking should they make plans to get out earlier than envisaged.

My answer is to not be reactionary, and make plans according to your own timetable(if you have one?!). Don’t let external factors decide your course of action as much as possible. This recent disruption should be short term. The adaptability of our industry should be able to ensure service and payment of services get remodelled quickly. Anybody in the business 15 + years will have seen several incarnations of this. Financial crisis, mortgage crisis, threat to pensions relief, heavy handed regulation amongst others.

A recent event I spoke at did a straw poll of the principals of Brokerages attending, circa 60% did not have an exit strategy or timeline for their own business, whether it be clean exit/sale, merger or down stream buyout model over a longer period.

I often think of Brokerage owners as Doctors who smoke, giving advice to patients/clients but not taking their own, when speaking of planning well ahead of retirement, taking money off the table in terms of wealth extraction of your business etc.

The main cause of this being that most Brokerage principles aren’t working on their business. They are working in their business as the main writers of business, plus head of finance, compliance, HR, service and so on. Bearing in mind 80% of Brokerages have less than ten staff this doesn’t allow much strategic planning for how to exit your business in the fashion you wish.

I have a rule of thumb for timing and it is at least five years. As in if you wish to have a clean exit in 2027 then you should be working on the following now;

·???????Internal due diligence/valuation

·???????Getting this number to where you need it to be or as close as possible

·???????Compliance & CRM house keeping

·???????Segmentation in a practical fashion

·???????Annual reviews to assess this

·???????Identifying buyer(s) by 2024/2025

·???????Getting as much recurring income into the business as possible

·???????Managing staff expectations where disclosure is possible

The General Insurance Broker market has taught me some lessons in terms of their business models and the valuations are interesting, they do seem excessive but that can happen in a hot market. GI Brokers are consistent, boring, mainly recurring and systems driven!

The same cannot be said of the Financial Brokerage sector, which is too often reliant on personalities, take them out of the business and all falls down. Brokerages in their exit planning should aim to de-risk on this.

Whether it be by Commission or Fees, we probably slipped up as an industry 20 years ago by not laying the foundation of ‘the client pays either way” and moving towards a more confident and transparent model. This is what is causing some to have a current confidence crisis in the viability of our distribution model.

Speak to any IFA in the UK post RDR 2013 and those who remained in the business have done well. The qualifications competencies laid out shook a lot out of the UK sector as part of RDR. People are speaking of master trusts, simplification, auto enrolment, CPC 116 and now Exec Pensions ban as signs of a commission ban by the back door.

Firstly what I what say is the following from a positive perspective;

·???????Brokerages now command 76% market share of financial advice

·???????The bank network is diminished with bank closures, changes in models and removal of Ulster Bank etc.

·???????Growing middle class accumulating wealth who need advice

·???????Robo-advice has been and continues to be a myth, when people build up any kind of 5 figure pot of money they seek guidance.

·???????Chaos in the world only increases the relevance of our industry, fortunately or unfortunately. The simplifications exercise by all stakeholders is going to require complex advice it somehow seems

The industry may have less players through natural attrition but will continue to be buoyant. There are threats such as a lack of technology investment and new legislation but this has always been the case.

If you are considering how you exit, don’t let the current climate impact upon your decision too much. You should consider;

·???????Selling a portion of your client bank, taking money off the table earlier than planned or striving towards a specific date all make sense.

·???????Many Brokerages I support in this space leave it far too late to consider, what this does is;

o??Impacts on your end value by being reactionary

o??Doesn’t allow for ill health, we talk of managing sudden illness/injury all the time but what is your contingency for such an event?

o??Your data is haphazard for any external party to come in during a due diligence exercise

·???????Allowing a staff member/new entity to buy in requires a lot of valuation and compliance planning

·???????Give yourself five years to assess your options as most Brokerages don’t want their business going back into larger institutions to be “un-serviced”

There will be a CPC-116 2.0 at some stage in the next five years from the Central Bank, my sense is that there won’t be an outright commission ban but a harmonisation of remuneration structures. E.G my house view is we take 2% upfront & 0.5% trail regardless of whom I place the business with, schedule of fees on your website with no room for variation. This is logical and many have moved that way already.

This allows ample time to get your house in order for your ten year plan/five your plan or the development of some kind of plan!

We do need an improvement in transparency of fees as it is complex for us, never mind clients.

A final thought, get your recurring income, whether it be trail/fees/bullet points/indexations to be a minimum of 40% of your total turnover!....This isn’t a scientific number but as a threshold it leaves the business in good shape for purchasing/buy-in.

If you would like my advice/support in devising this for your own Brokerage, I work actively in this area and happy to share my thoughts/services.

Paul Kelly

MD of ClearChoice/Trusted Advisor Group