Mutual fund distributors should plan their succession as they owe it to their clients, family and employees, said noted trainer and author Amit Trivedi. Amit was in conversation with K S Rao, Senior Vice President & Head – Distributor Development & Investor Education in the second episode of 'Lessons from the Masters’, a webinar series from Aditya Birla Sun Life MF and Cafemutual that brings out nuances of various aspects of the distribution business.
Amit said that by planning their succession, MFDs can ensure that their clients are protected even in their absence. Further, it helps their family and employees as well.
Ways to transfer business
Amit explained that the transfer procedure would vary depending on the business model. He said that broadly there are three models to run distribution business - company, partnership and sole proprietorship.
Succession planning is easier in case of companies as the distributor can reduce his stake in the business gradually. If it is a partnership model, the other partners can take over. To ensure a smooth transition, MFDs can induct younger partners to take over the business and ensure continuity.
If it is a sole proprietorship model, check if the next generation is ready, willing and capable to take over the business. If yes, they can be the successors. Otherwise, individual distributors can look at entering into a partnership. Another option is to sell the business to your employees, as they will be well acquainted with your business and client book. If none of the options are available, distributors can sell the business to other MFDs.
Identifying successor
Amit shared three important characteristics of a good successor through an acronym ‘TAP’.
T - It’s a trust based business, so your successor must possess the integrity and competence to take over the business
A - The successor should be able to easily adapt to the dynamic changes - be in terms of regulations, technology, products or operations
P - The successor need to be a people’s person who can form an emotional connect with clients
Similarly, if someone is looking to merge their business, they should come together only if their mindset is reasonably similar. For instance, an MFD handling HNIs and ultra HNIs is likely to have a different business model from someone who targets retail clients. Operating in different cities, following different cost structures and so on are among other variables that MFDs should carefully look at before merging their business.
Determining valuation
Amit said that while selling the business, it is important to determine the right valuation - both from the buyers and seller’s perspective. And the starting point to evaluate it cannot be a function of blood, sweat and tears invested by you.
The factors that can influence valuation of the distribution business include quality and sustainability of cash flow, size of AUM, client mix, depth of client engagement, asset mix, brand image, staff longevity, client acquisition and so on.
And when an MFD sells his business to another MFD, the payment needs to be made in multiple stages:
- When both parties agree to the deal
- Holdings in the top 5 fund houses are transferred
- Meeting with the top clients
When to start succession planning
Amit concluded this by using one of Warren Buffett’s quotes. The best time to plant a tree was 20 years ago. But if you have not done that then the next best time is TODAY.
