What impact would 0% asset management fees have for advisers?

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Are we seriously talking about 0% asset management fees? Well maybe not yet in Ireland, but Fidelity recently announced the introduction of two core equity index mutual funds covering the U.S. and international markets without any management fee.

If we saw a similar development in Ireland, what would it mean for financial advisers? And even if we don’t, what impact will the downward pressure on investment manager fees have for advisers?

 

A forensic analysis of fund management charges by clients

The two big asset manager stories over the last year or so were first of all when Vanguard announced a flat 0.3% management fee, regardless of how much an investor has in their account. This fee includes access to a CFP professional who will provide financial planning and investment advice. This was followed this summer by Fidelity’s announcement of 0% fees on two of their funds. These price developments will inevitably move closer to Irish shores over time and when they happen, they will be (rightly) trumpeted loudly by providers. This in itself will bring a keen focus from clients on the level of fees that they are paying into their existing funds.

We are certainly not advocating that fund management fees are the only factor for investors to consider – far from it in fact. But should fees reduce substantially, the reality is that investors will more regularly raise this issue with their adviser who will need to be prepared. The adviser will need to be crystal clear about their rationale for guiding clients towards higher charge funds. Higher cost funds make sense for many clients – you just need to be ready to clearly articulate the reasons!

The bottom line is though, fund management fees are likely to come under ever-greater scrutiny.

 

A lower overall fee creates adviser opportunities

One of the most common refrains I hear from advisers being unable to charge 1% (or even 0.75%) trail for their own services is that the current fund management fees don’t allow it. They argue that when you add 75/100 bps on to  a high management charge, that the overall charge is simply too high.

If the fund management fee went to 0%, surely this problem goes away? Now the only charge that would apply would be your 0.75% / 1%, which would not overly impact the returns achieved by clients. Could you charge a higher trail then and justify it to your client?

I’m not so sure that a reduction in fund management charges would be the silver bullet that some think it might be. The argument of fund management charges being too high sometimes hides an underlying issue of some advisers being unable to engage and convince clients in the value that they themselves (the adviser) are adding.

 

Can you articulate and demonstrate your value (and justify higher trail)?

How do you actively demonstrate to your client that you are worth paying 1% per year to? How clearly do you set out to your client the value that you add and the difference that you are going to make in helping them achieve their lifestyle and financial goals? How do you demonstrate the expertise that you bring to the table to help them, and both the quality and amount of work that you do on their behalf? How do you convince your client that they are fortunate to have found you, and that your 75/100 pbs charge is worth every single euro?

If you are not able to do this, even with reduced fund charges your client will still baulk at the charges. Now they will realise that most / all of the ongoing management charges are going to you and will really want to understand what they are paying for. Your fee won’t get “lost” any more in an overall charge.

To be able to articulate and demonstrate your value, you need to take a step back from your business and spend time identifying the value that you add and the difference that you make to the lives of clients. You need to articulate that value, your advice methodologies and be able to demonstrate the structure and rigour of your approach.

Only then can you justify your trail amount, irrespective of the direction of fund management fees in the future.

How can you improve the value of your business?

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We wrote last month about the different ways in which a potential buyer will look to value your business. This is a follow-up piece about how you might increase the value of your business, to ensure you extract the very best price possible. Obviously your recurring income is a crucial starting point. However a good business is about a lot more than a simple multiple of your recurring income. There are a number of ways ways that you can demonstrate additional value in your business, which will allow you drive up the price.

 

Work through all the valuation methods yourself

As set out last month, financial advice businesses can be valued using a number of different methods. The oldest (and simplest) model is the multiple of revenue model. However this is being replaced today in some cases by buyers using a multiple of the profitability of the business (usually excluding the business owner’s earnings) as this takes account of both revenues and costs within the business.

It is really important that you consider all of the potential valuation methods, as a purchaser most likely will do so! If a particular valuation method is proving very difficult in justifying the value of your business, are there changes that you can make that will improve the picture? Doing the calculations yourself and being prepared are really important to achieving the price that you want.

 

Drive up trail & other recurring incomes

Obviously there is no point just a year or two before you want to sell up, to really start trying to make the switch from upfront commissions to the flatter income structures that are far more prevalent today. A purchaser will want to see a steady and increasing recurring income stream over a prolonged period. If a sale of your business is on the horizon at all, now is the time to start making that shift to increase your recurring income stream – the StepChange “Getting to 1%” programme could really help you here!

 

The persistency of business is crucial

Of course the size of your business is a main factor. But so equally is the persistency of your revenue. Lapse rates have become a major issue for life companies and advice firms alike, so obviously persistency will significantly impact the price someone is willing to pay for your business. There is little value in a firm that can’t demonstrate an ability to build up a durable revenue stream.

There are a number of steps that you can take to help address any purchaser concerns in this area. Preparing the ground for an effective “earn-out” period will really increase the confidence of a potential buyer – one of their concerns will be your commitment in this area. Also reducing the reliance of clients who seek to deal exclusively with you will also help. If you can demonstrate that clients deal with your business rather than just you, a buyer will feel more confident about those clients staying with the business.

It is also worth looking at the remaining advisers in your business. Having them tied into solid contracts with clear non-compete clauses should they leave, will again help you in your negotiations with a buyer.

 

Have a winning business proposition

A buyer will want to believe that he or she is getting more than their money’s worth when running the rule over your business. A very compelling business proposition will help to provide this comfort. For example, this may be strengthening the buyer’s position in their chosen market or indeed giving them access to a new market. It may be a unique expertise that your business offers or strength in attracting a particular target group of clients. A strong position within a niche market can be a very attractive proposition! If you own a brand that is really well known in an attractive target market, this is a very valuable asset. However on the other hand, if you’re not clear about what’s unique about your business and be able to demonstrate this, you cannot expect a prospective buyer to see this potential.

A buyer will also want to be purchasing clients who are engaged by and committed to your organisation, and are likely to stay with the firm going forwards. To achieve this, you’ll need to ensure that your processes for ongoing client engagement really stand up to scrutiny.

 

Your service and compliance systems are very important

Potential purchasers also want to minimise the headaches involved in a purchase. They want to buy a well-run business that looks after its clients in a professional and engaging way and is compliant in everything that they do. In fact better still, they want to buy a business with potentially better processes and systems than their own, that they can then leverage for their now expanded business. There’s a real opportunity to make your business more attractive to a buyer through utilising excellent business processes.

 

Your people are the heartbeat…

While your clients are at the core of your business, your own people are the heartbeat of it. They have the strong relationships with your clients, the expert skills that potentially are sought by a buyer and the capability to deliver brilliant service to attract and retain your clients and valuable income stream. A highly skilled, cohesive team is an enormous asset when selling.

 

These are just some of the factors you might think about as you prepare your business for a potential sale. If you have any comments in relation to the above or indeed can identify any other factors, please leave your thoughts below.

What’s your advice business worth (to someone else)?

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This is the first in a two part-series of articles that examines the sale of financial advice firms. In this initial article, we consider the various valuation methods that can be used to place a value on your business. Next month we’ll take a look at some of the ways that you can (positively) influence that value.

How to value your business

There are many methods that are used to value businesses, however the most common methods are,

  1. A multiple of recurring income
  2. A multiple of EBITDA

We’ll examine both of these in turn.

 

A multiple of recurring income

This is still the most widely used valuation method, and it is certainly the one used in casual conversations among advisers. This is the basis that is quoted in relation to any “buy back” agreements in place in the market. This basis is popular because of its simplicity, and also because a potential purchaser will be satisfied that they are buying a future income stream. The value of the business is not skewed by a huge uplift in new business sales (and attaching initial commissions) in the year or two before the sale of the business.

Of course the next question is – what’s the multiple! And that’s really where the negotiations start. This will be determined by a whole range of elements including;

  • The business retention strategy in place and the actual retention record of the business. This is a critical factor for would-be purchasers.
  • The compliance profile of the business – are the systems in place robust or is it all a bit lacklustre, with potentially significant hidden problems down the road?
  • The synergy between the seller’s business and that of the purchaser. This includes target markets, systems and the ability to easily integrate the two firms. These factors may make one potential purchase a better prospect than others, as the purchaser may gain more from synergies and be willing to pay a higher price.

 

Multiple of EBITDA  

The simple calculation based on recurring income is not deemed sufficient in all situations. For larger firms, a more refined calculation method is often deemed necessary, and this is where the multiple of EBITDA (Earnings before interest, tax, depreciation and amortisation) comes in, as this takes a much broader view of the business as a whole and looks at the actual profitability of the business.

When this calculation method is used in relation to smaller firms and where the business owner’s salary is the main overhead, EBITDA is often adjusted by removing the owner’s salary from the calculation as this can often significantly skew the EBITDA figure. With the salary excluded from overheads, a prospective purchaser can get a clearer picture of the real profitability of the business.

 

Payment Terms

Usually when an advice business is sold, there is a handover period where the previous owner remains with the business for a year or two to ensure a professional handover of the clients to the buyer, and to assist in the retention of those clients.

As a result, the payment terms usually include some of the purchase price to be deferred – maybe with half paid up front and the remainder paid in tranches over the following two years. There will typically be penalty clauses if the retention turns out to be lower than anticipated. These terms are really important, as they align the interests of both the buyer and seller towards a smooth handover with high retention rates.

 

Make the process easy

Due diligence before a sale is key. Once any confidentiality agreements are in place, it is really important that the required information is easily accessible to a prospective purchaser. If they feel they have to drag the information from you, they will wonder what you are hiding. So make sure you are capable of providing the required information before you start seeking out a buyer.

Equally, be realistic in your price expectations. While of course you may not choose to take the first offer that comes your way, don’t hold out forever for that elusive windfall sale price.

 

These are thoughts solely on the financial side of selling your business. In a follow-up article, I’ll look at steps you can take to actually increase the value (and more importantly the price!) of your business.

Just bought a business? Turning 2 into 1

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So you’ve made the big move… Your business is in growth mode and you’ve decided to accelerate that growth by acquiring another advice business that’s for sale. The price has been agreed, as has the structure of the deal relating to the earn-out period and terms for the owner of the acquired business.

While this is a big step and great progress to get to this stage, there’s still a lot of work to be done. Because according to a 2017 Harvard Business Review report, the failure rate for mergers and acquisitions (M&A) sits between 70 percent and 90 percent! A very scary figure… Now of course this figure applies across all industries and you can argue that’s it’s different when buying another financial advice business. But there is still lots to consider if you want to integrate the acquisition successfully and maximise the value of the deal. So where do you start?

 

Have a very clear strategy

Of course you likely will have given this a lot of thought before you get anywhere near the integration phase. Hopefully you have a very clear vision of what you are setting out to achieve. Does the acquisition simply increase the number of clients of your business, or is it opening up new markets? Is it giving you capabilities in new areas of financial advice, or is the acquisition delivering significant cost savings when the two businesses are put together?

Know where you are going and what it is that you are trying to achieve, as your strategy should be the guiding “North Star” for your integration process.

 

Build a very robust plan

You need to have an integration plan for every area of the business. If you want the integration to be successful, this plan has to be developed carefully and thoroughly, building a clear roadmap for every key service area – your advice process, your service proposition, your compliance process and right through to your HR processes. You have to ensure that you have the required resources in place to actually develop and follow through on this plan.

If instead everyone just blindly “hits the ground running”, there is a strong likelihood of a significant fall-off in performance and even chaos a little bit down the road! To avoid this, give some thought to the following areas before you set out to integrate the two businesses.

 

Consider culture

This is an area that the leader of the business needs to consider carefully and be very involved in. Are the cultures of the two organisations similar or are they quite different? What is the desired culture of the merged operation going forwards and what are the main steps to help you to start building this culture? This will need clear leadership and involvement of all of the staff.

 

Good integration takes time and focus

It won’t just blindly happen. Your carefully developed plan will need to be delivered in a structured way. This will take the time and focus of some key people – maybe you, maybe members of your team. You need to recognise the cost of this as the focus of these people for a period of time will be on integration of the two businesses, rather than increasing the income of the business. However this short-term cost will definitely pay dividends in the longer-term.

 

Who are the right people to carry out this work?

If you want the integration to happen successfully, you need to have the right people carrying it out. There can be a temptation for the leader of the business to lead the integration work. However it may be that their attention is better spent elsewhere, for example leading the commercial focus of the business for a while and guiding the expectations and requirements of clients and business partners. The leader of the business should be close to the integration, but does not necessarily need to lead it. Sometimes there appears to be an “easier” solution and the integration process is passed to someone who “is not that busy”, but who may be completely unsuited to the role. This is a recipe for disaster.

The integration role is best carried out by someone who is very structured in their work and who is capable of keeping a project with multiple strands on track. If they have very high credibility in the office and strong relationships with colleagues, this again significantly enhances the likelihood of success.

 

Follow through

Finally, don’t get side-tracked by current business pressures, see the integration through to the end. That is not to say of course that you won’t change tack at times, but when this happens, tweak your integration plans rather than leave them behind.

 

A good integration process will help you ensure a successful result after your acquisition. Follow it through relentlessly and you can reach out confidently towards your goals.

“I know someone who’ll charge me less”

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You’ve all been there… the fight over price. You know you’re right for the client, you can add a lot of value, but you can see there is an immediate issue niggling away. You probe the client and they say something along the lines of, “Let’s cut to the chase, what do you charge as I’m talking to another adviser who will manage my assets for 0.25% p.a.”?

Assuming you charge 0.5%, 0.75% or even 1% p.a., what do you do?

 

1. Now’s not the time for negotiation

The fatal mistake is to start negotiating your price now. After all, the client has absolutely no idea what they are paying for at this stage, and the value that they will get from working with you. Obviously you can’t ignore the question, but the answer needs to be along the lines of, “I can hear that our price is a key consideration for you. Let me set out what we do first, as there are a range of different options available to you”.

Don’t let yourself get dragged into a price war at this stage!

 

2. Go through your normal initial meeting process

This is where you take control of the meeting again. Rewind the meeting to understanding the client’s objectives (through careful, open questioning) and then presenting how and what you do. This is where you set out your advice process, your annual review meeting process and the ongoing service packages that you offer. Assuming you offer differentiated service levels for different segments of clients, your client will now see what you have to offer at different price points. If the client wants rock bottom pricing, well then he / she will see that they won’t be getting a premium service at that price level.

In order for your competitor to offer such a low price, they are probably not promising anything! So the other advantage of taking the client through your approach is that it will demonstrate the significant advantage of working with you as opposed to your competitor.

 

3. Be firm and brave!

Stand by your pricing as a premium advice provider. Acknowledge that you are more expensive; your client will actually respect you for this. Yes you can have lower cost packages, but within these the client should be left in no doubt about what is included and more importantly what is not.

What if the client looks for your premium service package for a lower cost? Well then you’ve a choice to make! Yes, you can be flexible, but I suggest only if there is a good reason… maybe the client is an important access point to an attractive target market, maybe you see broader opportunities with them. Don’t just agree without a reason, or otherwise you will simply start dropping your price at the first hint of a push-back from anyone. Sometimes it’s better to walk away, rather than agreeing to a price that doesn’t make economical sense to you.

 

4. Make sure you can deliver… and prove it

If you want to charge higher prices than your competitor, you have to able to deliver more. So it is very important that you can actually deliver what you promise. The last place you want to end up in is the dreaded “over-promising and under-delivering” experience for clients. This is the certain road to losing clients.

Of course your prospective client won’t have experienced your service at this stage of your relationship. So this is where you need to be able to call upon the experiences of other satisfied clients to add validity to your promises. This is where those client testimonials, LinkedIn recommendations and case studies of previous work come to the fore. They paint the clear picture of what your prospective client can expect.
5. Add value beyond the sale

Finally look to add value beyond the sale. Are there services that you can offer to your client that sit outside of your service packages? Maybe you can provide a willing 2nd opinion on any broader issues they might have in relation to financial planning? Maybe you can give them access to a broad network of business professionals that can help them in running their business? Or maybe you can refer some of your contacts to them as potential clients?

 

At the end of the day, you’ve a choice to make. Is your competitive advantage based on offering your services at the lowest price, which ultimately will be a race to the bottom? Or can you offer superior value and build your business around delivering this value, at a higher price? The choice is yours!

 

5 myths about financial planning businesses

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I’m finding that more and more of my time is being spent helping advice firms reposition themselves as true financial planning businesses in the eyes of their clients. It’s extremely interesting work, as it always results in the adviser taking a really deep look at their business, as we carefully then figure out how the business will look differently in the future, and the steps that need to be taken to get there.

 

I’ve noticed as I’m doing this work that there are a number of myths that seem to crop up regularly and make the change quite daunting, that need to be gently taken apart and pretty much discarded! So here goes with the 5 myths that raise their heads most frequently.

 

 

Myth #1: My biggest challenge is how much to charge

This pricing challenge is where the conversation between the adviser and me often begins, along the lines of, “I know what I want to do going forwards, but I just don’t know how much to charge and if I can get this piece right, I’m grand!” You actually have a far bigger challenge in identifying how and where you add lots of value to your clients, and then being able to communicate this effectively and in an engaging way. The prize though for doing this work is that when you are crystal clear on the value that you’re providing, and you can get this across to your clients, you suddenly get a new-found confidence in the whole area of pricing, which then pretty much falls into place – trust me!

 

 

Myth #2: Commission is bad, fees are good

Now this is certainly not going to be a strident defence of commission. Because in my eyes, that simply is not needed. Commission is a method of payment that can and should be used to remunerate an adviser for the advice that they give. As are fees – an alternative method of payment. Both commission and fees have their advantages and their drawbacks. They both have their place, each suiting different scenarios.

 

Where commission has earned itself a bad name in the past is around the (lack of) transparency with it. This has been addressed somewhat with commission disclosure and indeed more recent regulations. But when you think about it, this is more an issue of adviser behaviour that a flaw in the payment system. When you are completely transparent with your client about the level of commission you are earning on products, it is an effective means of being remunerated.

 

 

Myth #3: Niches are not a viable strategy

I’m not a financial planner but I think I can talk from experience on this one… When I set up on my own and told friends and colleagues that my business was going to be aimed solely at financial advice firms, I was told I needed my head examined! “Having a target market of only about 1500 firms is just too small” (no it’s not) and “advisers won’t pay for outsourced services” (oh yes they do) were probably the 2 most common refrains.

 

Niche strategies bring challenges in being able to demonstrate expertise in your chosen niche and you also need to be able to reach your chosen market. But they also make life very easy… Imagine if I was trying to write this article to appeal to financial advises…. and accountants, lawyers, shopkeepers and rock stars! Suddenly it becomes very difficult to actually demonstrate your engagement with their specific issues. So if you have a specific customer / market expertise or a product area advantage, it may well be a viable strategy to become the kingpin in that market segment. Don’t rule it out!

 

 

Myth #4: There’s still a strong future for product-led advice

A bit of a tricky one, because there probably IS still a future for product-led advice. But it’s likely to become a steeper and steeper climb in the future. The winds of change just don’t auger well for advisers who position themselves as “product solvers” rather than providing comprehensive financial planning and advice.

 

It is very hard to demonstrate real value when simply picking a product or fund etc., you are always at the mercy of new competitors seriously disrupting the pitch (think Vanguard in the USA & UK) and it’s very hard to build long-term trusted relationships based on product picking alone. Technology has the potential to significantly disrupt product-led advice and your price will be constantly under pressure from commission transparency (a good thing!) and possibly future regulation. So while there may be some road left for advisers whose business model revolves solely around product selling, I think it’s likely to be a tough road.

 

 

Myth #5: It’s too hard to change direction

Well the proof is in the pudding! We only have to look around and see the financial advice firms that have completely reinvented themselves in all four corners of Ireland. There are many firms who have worked extremely hard on building their proposition, have developed a multi-channel range of tools to communicate this proposition in a comprehensive and engaging way and are now reaping the rewards of stronger client relationships and higher income streams that they can more easily seek and justify.

 

Yes the work takes structure and focus, and requires thoughtful analysis of your own capabilities, market opportunities and client segments. But when done well, this work is also hugely rewarding and insightful. And this in turn leaves you with a business that you are extremely proud of and re-invigorated to reap the full potential of your hard work.

 

So if you’re transitioning your business to a full lifestyle financial planning business, don’t believe the myths and instead continue to work on building that future-proofed business that you want.