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Succession planning: Selling to managers

Selling out to a fund manager is a succession option that's becoming more and more possible for small financial planning practices.

Wednesday, February 27th 2002, 10:06PM

Selling out to a fund manager is a succession option that's becoming more and more possible for small financial planning practices. This is because, with the advent of technology, such as master trusts and wrap accounts, fund managers are less and less likely to know who their clients are.

As Alan Anderson of Money Managers points out: "They [fund managers] are therefore very keen to get these financial planning businesses and clients back into their books."

Eighteen months ago Armstrong Jones signalled its interest in this market with the advent of the Portfolio Group. The company made it clear it did not want to own financial planning firms.

Instead, it wanted to build and support a network of independently owned practices which, among other things, would place more than half their managed fund business in Armstrong Jones' managed or administered products.

So far 36 companies - 110 advisers - have taken up the offer and joined the Portfolio Group. The network has approximately $1.5 billion of funds under management.

Unlike other networks the Portfolio Group is not a franchise operation. Members enter a contractual arrangement with Armstrong Jones and pay an annual licence fee of $5,000. A key element of the licence agreement is that Armstrong Jones will, if needed, act as a buyer of last resort.

This means when an adviser wants to sell his or her practice, Armstrong Jones will buy the business or, more likely, find and fund another adviser to buy it. This agreement also applies if an adviser dies or is permanently disabled.

David Greenslade, who has set up the network for Armstrong Jones, says the need for a succession plan is one of the top reasons advisers join.

"As well as a long-term exit strategy, they're also looking for the opportunity to expand their business through acquisition. Armstrong Jones will provide funding for people to acquire other businesses or just to pick up skills to make their businesses more profitable," he says.

Greenslade says many of the practices, when they first join the group, could not be sold because they are not run as businesses.

"Before the buyer of last resort kicks in we need about two years to work with them, to get them to switch from regarding their practice as being pure lifestyle to being more of a business. Then they're quite saleable," he says.

So what do planning practices get when they join the Portfolio Group? As well as the buyer of last resort option Armstrong Jones promises to help advisers expand and manage their businesses so they have more options available when they retire.

This includes developing management skills to enable them to focus on the areas that are most profitable for their business growth, client retention and bottom line profitability.

Armstrong Jones will also help advisers to train and recruit appropriate staff and introduce systems and procedures so the business operates relatively independently of them. This is so they can concentrate on maximising dollar returns in the areas they are best suited to.

The buyer of last resort option kicks in after an adviser has been with the group for two years.

Under the last resort formula, practices will be valued at 230 per cent of annual renewals on Armstrong Jones' managed and administered products and 175 per cent of annual renewals on any other product.

Given the group has only been in existence for under two years no one has yet had the chance to exercise the buyer of last resort option.

Greenslade says, as well as offering a fall-back exit strategy, the formula gives advisers who are looking to sell a baseline to work from. Knowing the business has a concrete value should also make it easier for them to attract potential successors.

"Because they have a funding facility from Armstrong Jones they can look at selling down some or all of their business and having younger advisers buy it. It's a way to attract younger people into the business," he says.
David Edwards, principal of the Money $hop in Lower Hutt, was one of the first to join the Portfolio Group in 1999.

"I felt that to be successful one had to be associated with, but not absolutely captive of, a successful fund management organisation," he says.

He believes the contractual relationship with Armstrong Jones works well as it allows advisers to maintain their independence and run their businesses as they like, yet receive ongoing support.

He has no trouble accommodating the requirement to place more than half his managed fund business in Armstrong Jones' managed or administered products.

At 55, he describes the buyer of last resort option as the cherry on the cake. He believes it has established a reasonable value on practices and given him and his family some certainty of what their asset is worth.

However, he stresses it is a foundation rather than a "must do". He would, of course, accept a better offer from the market.

"It [the buyer of last resort option] only values the business under management, it doesn't value the business itself. The name, location, chattels and lease are on top of that."

What he finds of greater value at the moment, however, is the support and training services on offer from the Portfolio Group. For instance, new advisers coming into a business have access to training and an on-going support network they can tap into.

Edwards makes the most of the group's "family relationship". "Being able to share problems with people in other centres and asking them what they've done is one of the biggest value areas.


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