How Independent Financial Advisors Can Turn their Businesses into Legacies

How Independent Financial Advisors Can Turn their Businesses into Legacies

Independent financial advisors, planners and brokers face one of their biggest challenges right at the end of their careers: how to turn their hard-won business into steady annuity income to ensure a financially stable retirement? The most common solution – selling the business as a going concern – may be the worst option. 

The Challenge of a Sale

Typically, these businesses are one-man bands, and so the price they would command is relatively low. The usual formula is a multiple of the annual turnover: 1.5 or twice is usual. This will not generate enough capital to replicate the existing income stream in retirement.

For example, an independent brokerage turning over R2 million a year in fees could expect to fetch R3 million to R4 million in a sale. Presuming a prudent drawdown of 5%, the capital realised would generate in the region of R175 000 per annum (R14 500 per month), a far cry from the income the previous owner had enjoyed. A reduction in income of this magnitude will inevitably have a drastic impact on the quality of anyone’s retirement, even if there is additional income from other investments. 

Small Transfer Issues

Another common – and equally unsuccessful – strategy is to “transfer” clients to another independent operator of similar size in return for a percentage of the continuing income stream. The drawback here is that smaller independents seldom have the time to service a number of additional clients nor the compliance, finance and admin infrastructure to cope with a far larger client base.

Working with a Larger Firm?

A reliable way to turn your independent business into a substantial annuity income stream is to undertake a carefully structured merger with a bigger independent firm. If this process is done correctly, the clients can be effectively transferred over an extended period. During this time, the owner can slowly introduce his or her clients to new advisors or brokers and allow for new relationships to develop. 

The result? The majority of clients will stay on board if the process is handled correctly. The successful transfer of clients into the bigger entity is obviously crucial in maximising the income stream going forward. It also serves the clients’ interests best, by providing continuity of service. It’s a somewhat delicate process, and we at GCI have actually created a dedicated merger department to handle it.

Our experience is that following a deliberate merger process delivers good results. The merged business actually grows because the team can dedicate its time to clients rather than running the business. This growth is good for all parties: clients receive better service and advice and, by becoming part of the GCI team, the advisors themselves earn more revenue. 

A healthy advisory sector is a national imperative as we attempt to help more people achieve financial stability and, crucially, a secure retirement. Providing a way for independent advisors to reap the rewards of their hard work, and ensure continuity for their clients, makes good sense. Achieving these goals, however, means looking beyond the obvious. 

Read more about Sandy de Bruyn of Sandy Wingfield-Turner & Associates who joined the GCI fold with a highly successful merger process.

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