Tuesday, 04 May 2010 14:11

Does RDR make your business valueless?

Written by  John Bloomfield
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jacket1touchedUnfortunately I think with this blog post I bring bad tidings.

I think it has been well documented that many IFAs do not intend to continue with their business post RDR. Instead for the majority the plan seems to be to build up as much trail or renewal commission within the business with the intention of building up its value with the ultimate aim of a profitable sale just before RDR hits.

With the logic of the pre-RDR world that a business is valued based upon its level of renewal or passive income and the FSAs assurances that any trail arrangements put in place before the RDR curtain falls would be regarded as historic and in some way protected.

This logic still stands up if your intention is not to retire but rather continue with the growth of the business however it falls down if you plan to retire! The FSA have indicate that in the post RDR world that every new client must agree their remuneration with their adviser and that on a transfer of Agency, trail will not be automatically transferred on to the new adviser who must instead put together a remuneration agreement with his new client.

If the above seems a little unclear let's try and talk it through with a few worked examples.

Example One: Sole Trader

So you are a sole trader you have spent the last 20 years building your business and have a great healthy renewal base of £50,000 per year between now and 1st January 2013 you have decided to forgo all initial commissions on new business instead opting for the maximum levels of renewal that you can obtain to "build the value of the business" as all the life office reps have been telling you to.

So as 1st of January 2013 rapidly arrives you start looking for a buyer, which I suspect might be tough enough as I think sellers will outnumber buyers at least 2 to 1, only to find that most regard your business as valueless as they realise that when they transfer the agency if it isn't processed before the 1st of January 2013 they will never receive a penny of renewal from the new client base!

And you might be thinking that it never takes long to transfer an agency - but what about when 5,000 advisers are getting out of the industry all at once!

Example Two: Limited Company

So you think you have the solution you will do exactly as you have in the sole trader example but become a limited company and then rather than sell and transfer the client bank you will sell the ltd company and thus no agency transfers are needed.

Except for the limited company to remain in receipt of trail commission it has to remain registered and regulated by the FSA, how is the buyer going to do this? I'm assuming that the buyer is likely to be an already operating IFA here, but they won't be able to be registered as an adviser with both companies! Nor will they be able to risk transferring their client bank in to your company without putting their own trail in jeopardy.

I'm sure that some of you will be thinking I just have to sell early but ask yourself this question - why would someone want to buy your renewal base at the prices currently being paid knowing that there is a very good chance post-RDR that they will not be able to sell them on?

It seems to me as a potential buyer, I'm only 30 and not quite ready to pack in yet, that the only value your business/client bank is really going to have is the good will that it brings.

Everyone that is planning on retirement has to take a good hard look at their plan for getting out of the industry and ask themselves the hard questions about what their business is worth and how they can effectively sell it when they retire.

Obviously this is still all up for debate, as RDR is yet to be fully settled.  Your comments on this would be great, use the form below!

 

Last modified on Tuesday, 13 July 2010 15:24
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John Bloomfield

John Bloomfield

John Bloomfield is an Independent Mortgage & Financial Adviser, and founder of both Sesame Forums and Adviser Forums

Website: www.pwfs.co.uk/adviser-profiles/john-bloomfield

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