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  • Writer's picturePatrick Isaacs

Navigating the DB minefield when selling your advice firm

In the past 13 years, I’ve brokered the sale of 346 companies in the UK wealth management space, from companies with £5bn in assets to advisers with £5m.

I have spoken to the great, good, bad and shocking, and on that journey I’ve learned a few things about what makes an IFA business attractive to a buyer, and what doesn’t.

Its contrary to logic. But if an advice firm has been trading a long time, has an exemplary complaint history, avoids volume esoteric investments, and generally runs a clean ship – but has written any more than a very small amount of defined benefit transfers, the owners frequently find their business swept in to the same bucket as less ethical advice firms who have actively pushed their clients towards Defined Benefit Transfers.

Many advice firms have avoided the issue through a healthy fear of the unknown. But does that make them better than the companies that agreed to do transfers? Where the majority of the uptake has been with existing clients and the FCA process has been followed?

Many companies with DB transfer exposure are still of the belief that it’s not an issue. I have heard dozens of company owners say their business has a robust process, and there are no issues – only for the company to fail compliance due diligence.

If you have DB transfer exposure, there are a few things you should know:

  • If more than 20 per cent of your assets under advice have originated from transfers, you will struggle to sell the shares in your business, meaning you pay significantly more tax.

  • If more than 30 per cent of your assets have originated from transfers, then you will struggle to sell even the assets of your business. Buyers will be worried about client attrition once they find their advice guarantee has fallen away with the sale of the assets.

  • Due to the creation of the senior manager’s regime, it is now necessary for IFAs to self-certify their advisers annually. This means that an acquirer will need to be confident of the fitness and propriety of all regulated staff before accepting them as future employees.

  • If you sell the assets, the FCA will require you to leave a proportion of the sale proceeds in the company, assuming you put the company into a members’ voluntary liquidation. Though bear in mind the liquidation and the length of time taken for the FCA to approve is not a given, and the seller could be carrying the risk for several years.

  • It doesn’t matter if you’ve been trading for 20 years with no complaints. The cost of financial redress with transfers is so extreme, you will still be unable to sell the shares.

  • If you have a written low volume of transfers then expect every case to be reviewed.

  • Insistent clients are an issue, even if you have written low volumes. It doesn’t matter that you followed the FCA process and your clients are adamant. Many professional indemnity policies will exclude them, and so will many buyers.

  • PI cover will be harder to secure with increased volume. Continuity of future PI cover is a big risk for the acquirer, and may result in large indemnities in any sale and purchase agreement.

  • Block run-off PI policies post sale are only available on an annual renewable basis – so be careful how you indemnify the buyer against past advice. If they ask for six years’ protection and you are unable to secure run-off protection, you are leaving you and your estate open to significant claims.

  • PI run-off cover often results in the value of the cover eroding significantly over time; costs increase, excesses rise, exclusions creep in and the effective protection to the seller can become minimal.

In many cases, there are still ways to achieve good value, protect yourself and your estate without “phoenixing” your business or stepping over the ethical line and taking away your clients’ advice guarantee. Navigating this minefield, however, is the challenge.

Patrick Isaacs - CEO

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