The power of the client bank

There are ways to make your client bank more attractive to potential purchasers, explains David Hesketh, group M&A manager at Perspective Financial Group Ltd

‘Client segmentation’ is a common issue raised in advisory circles as is the accompanying notion of working your client bank in the correct manner, and getting the most out of your existing database. Your existing clients are your most fruitful source of growing business levels and income, and there is still much to be said for spending as much time as possible mining this invaluable resource alongside the search for brand new clients.

However, what if you have reached that point in time when you decide to retire or leave the sector to pursue other interests – perhaps you have decided that the business changes necessitated by the RDR, for example, are not for you and it is now time to move on? Many self-employed advisers, for instance, will undoubtedly have been weighing up these sorts of decisions over the past months and wondering perhaps about the value of their own client bank and if there are any potential suitors for it?

As a national IFA group which has grown through consolidation and the purchase of IFA firms we have concentrated specifically on buying practices ‘in the round’, so to speak. By this I mean we have focused on buying established, profitable practices which post-purchase continue to operate as they have always done but with the added financial and resource clout that a national operation can provide. This remains a strong focus for us however we have also, where appropriate, purchased specific client banks from IFAs.

The purchase of a local competitor’s client bank can be an effective way of expanding a business quickly whilst potentially enhancing your profit margin – for this reason we provide capital to our 20 offices to acquire local client banks where appropriate.

There are however a number of areas to consider for both the IFA looking to sell their client bank and any potential purchaser. For the former, the first point I would suggest considering is to have a realistic valuation in mind and to enter discussions with an open mind. You may have thousands of names on a database but this will certainly not cut the mustard with a potential acquirer who will be looking to see how many active clients you regularly service and the income that has been, and currently is, being derived from them. Of course there will be potential future income to consider and ‘good will’ however this is a very small part of the equation when considering a client bank offering.

IFAs with client banks should also consider what they want for their existing clients going forward. What is the make-up of the bank and what would their expectations be should you decide to sell and accept an offer? It often makes sense for the adviser to commit to staying on and smoothing the path of any acquisition should this happen. It is in no-one’s best interests for an adviser to announce to their clients they have been ‘sold’ on a Friday only to then see both the adviser and the clients disappear over the horizon on the Monday.

An orderly, transparent move is required that keeps everyone in the loop and on board in terms of what service the client can expect. We recently bought a client bank where the vendor committed to working with us over a 12-month period specifically to source new clients and support the new adviser who will now service the clients. This obviously helped us enormously and made the client bank much more attractive to purchase.

This is all about managing client expectations and outlining clearly there will be little change to their day-to-day dealings with their adviser, and potentially a significant number of benefits to the new arrangement. We would also suggest that providing a potted history of RDR, what it means, the changes that will come into force, and how this has helped determine the Principal’s decision to sell could also help in securing a client’s understanding, and their ongoing business. At the end of the day, all concerned want the clients to feel valued, safe and secure in their new surroundings.

Therefore, while smaller IFA practices may look at the headlines surrounding large scale acquisitions, they do not have to feel they are cut off from this marketplace. There will always be an attraction to a profitable, well-managed client bank and certainly for operations like our own, we envisage more activity in this area in order to support and develop our existing offices.

Our advice would be to be prepared for all the questions acquirers will ask – i.e. have up-to-date financial information, PI documents, etc prepared and enter into all negotiations with an open mind.