BusinessCorporate FinanceIFA predators close in on firms

IFA predators close in on firms

Independent financial advisers thinking of snapping up accountants' financial service arms should tread carefully.

News that Thomson’s, one of the country’s largest firms of independent financial advisers, is eyeing up the financial services arms of several accountancy firms is a sure sign that something is stirring in this market.

The first acquisition will happen within the month if Thomson’s prediction is to be believed. And it is not just Thomson’s.

Other IFAs such as Greenoak are also rumoured to be looking covetously at various financial services arms. And why not when the financial services market, in the words of one consultant, has the potential to be ‘the biggest in the world’.

The theory behind why the market is suddenly looking so attractive goes something like this. The potential for big returns in either building up a reliable revenue stream or developing a financial service good enough to sell off has long been there.

However the latest interest in the market seems to have been prompted by the introduction of new regulations which appear to make a sell-off a more attractive option for the accountancy firms. The dawn of N2 in December added a new tier of regulation by making it necessary for practices to register their investment arms with the Financial Services Authority.

Previously they only had to do so with their relevant professional bodies such as ACCA.

Some feel that these new rules could act as a deterrent for practices wanting to retain their financial services. Thus, the simple formula is that market potential multiplied by increased regulatory burdens for accountancy practices equals a situation whereby sellers want to sell and buyers can move into buy.

‘I think regulation will become relevant and drive people into the corporates,’ says Phil Shohet, managing director at Kato consultancy. And some practices can make big returns he says. ‘I know of a number of accountants that have sold their financial arms on and sold it for very big money.’

In one case, says Shohet one practice sold out for 14 times the value of the renewal commission of retaining a financial adviser.

The kind of firm that could look particularly attractive to an IFA looking to move into the market is one with four or five partners which has a varied practice, working in say, tax, corporate finance as well as financial services. Medium sized firms with a turnover running into the low millions are thought to be the targets of any predatory IFA.

So the future is clear; we should all expect a rash of deals to make the headlines as accountancy practices rush headlong into selling off their financial services.

However it may not all be that simple. Selling-off is not the only option.

Building up a decent in-house financial arm and enjoying the profits that entails is still attractive.

To sell might be construed as shooting the practice in the foot especially if revenues remain constant in times of an economic downturn. Assessing the long-term value of the business, Shohet says, is essential, not merely following the market trend. An in-house operation must question the viability of the service and justify the costs before making any final decision.

The really canny practice might even consider selling and then establishing a completely new financial arm if it feels the potential is there.

However there are other options. One is that of joint ventures between the accountant firm and financial consultants. One firm looking into this possibility is RJ Temple, a group of independent financial advisers with offices in Brighton and Manchester.

‘What we have decided to develop which, in theory, works very well is a support base between an accountancy firm and independent financial advisers on the basis that the biggest accountancy firm,‘ says Laurence Holden, group director with RJ Temple.

The attraction for a practice is that they have none of the ‘compliance risks or the costs’ says Holden. And interest is beginning to blossom, he says. ‘We have an agreement with four practices to move into these joint ventures.’

But, says Holden, becoming a joint venture does not guarantee success.

The company still has to provide an attractive service. ‘Forming a support base with an accountancy firm in itself does not mean success unless everybody understands financial services,’ he says.

Gordon Gilchrist, marketing director with 20/20, is sceptical that the market for financial services arms will take off. Instead, he says accountants should trade on their good reputation and keep control of financial services.

‘Most clients trust their accountant more than anybody else. The marketplace is looking for credibility,’ he says. 20/20, like RJ Temple, believes support services can be given to practices to enable them to get the most out of their financial arms.

And he adds that as the market becomes ever more valuable, competitive prices will be forced up leaving many IFAs unable to afford to buy. ‘The cheque book just isn’t big enough,’ he says.

Rationalisation within the market looks likely though as it becomes increasingly competitive. However whatever happens to the market Shohet says the principle will remain the same – find the right IFA.

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