How Independent Financial Advisors can Realise the Full Value of their Businesses

How Independent Financial Advisors can Realise the Full Value of their Businesses
joshua marran

An exit strategy for financial advisors that can create an annuity income that better reflects the value of their businesses.

Joshua Marran
Integrations Specialist at GCI Wealth

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Independent financial advisors who have created excellent businesses with a solid client base and a growing income stream often end up selling those businesses when they want to slow down – but ultimately find themselves in a poorer financial position than they deserve. The problem is that they are selling just as their business is reaching its most profitable stage, and they are at the height of their influence.

Right business, wrong time

The majority of advisors fall into the same age bracket as their clients, with both approaching retirement roughly within the same time frame. This is when those clients will be realising provident funds and other retirement savings in order to provide annuity income – in other words, their wealth is at its peak and their need for trustworthy advice is at its most acute. 

At the same time, the advisor is at the peak of their ability to attract new business. They will have built up a certain reputation over the years within the industry and their clients’ networks. 

In short: there could not be a worse time to sell – the advisor would simply be forfeiting the additional income from managing a larger pot of investments and from a new client base. In addition, the capital sum to be realised from the sale of the business would never be sufficient to replace the existing income stream, let alone the augmented one described above.

Most independent businesses of this nature sell for around twice the annual recurring income. A business generating R500 000 a year would thus sell for something like R1 million, a capital sum which could generate only in the region of R40 000 a year safely.

The Solution

In response to this challenge, we have developed a methodology for incorporating the advisor into the company. This has the immediate advantage of freeing the advisor from the drudgery of running the business, effectively allowing him or her to act as a true business-owner, rather than chief-cook-and-bottle washer. He or she will be able to concentrate servicing his or her clients as they enter a phase of needing the most advice.

Thanks to economies of scale, we can perform these back-office tasks at a reduced rate, thereby making the original client book more profitable.

At the same time, the existing client base is gradually introduced to highly skilled Wealth Managers from within our team, ready for the time when the original advisor is ready to retire. These advisors are chosen in collaboration with the original advisor to ensure the best possible fit with his or her clients. This is also good news for the clients because they are effectively being serviced by a team and are assured of continuity.

In parallel, the original advisor leverages his or her network to acquire new clients which are passed onto these colleagues.

We set this up so that the original advisor continues to receive an annuity income from the entire client base during retirement. This percentage is agreed upfront but is typically between 8 and 10 times the multiple of revenue that the capital realised from an outright sale could generate.

This carefully phased methodology has proved to be a great way of helping independent financial advisors reap the full advantage from all their hard work and set them up for a financially secure retirement.

Read some of our successful merger testimonials here.