How did the idea of launching a market place for IFAs come about? How is it relevant for iFAST?
Succession planning is a topic that is discussed very often in different professions. I have heard this conversation amongst lawyers as my father is an advocate. So is the case with financial planners, specifically from UK and US. The market place should be seen as a means to address this issue.
The idea is to ensure easy transition for clients and provide an exit option to advisers. There is a saying, that in doing good, you do good as well. So, when an IFA ensures that his customers needs are met continuously by someone equally or better competent, what he also ensures is that his dependents continue to get a share of the ongoing income from such clients. If the IFA is riding purely on a simple nomination, it is just a matter of time that the future recurring income will shrink over time because clients would expect certain services that the nominee would not be equipped to provide.
How is IFA succession planning done in USA and other developed markets?
Succession planning has already evolved to more granular levels in the developed market. It has become one aspect of continuity planning. We must understand here that continuity is about the services being offered to the customer in the absence of the original service provider. Continuity takes two dimensions – one triggered by unexpected or unforeseen events (death, disability etc.) – this is called contingency planning, the other is triggered by a planned transition (retirement, merger, sale etc.).
In my experience, IFAs in the US not only have a contingency planning in place, they also have firm agreements on guardianship of the assets on replacement.
A guardian agreement states that till the time of merger or acquisition of assets, the guardian will take care of the clients for which he would earn a portion of the fee/income. The rest of the money would be paid to the family members of the IFA. Once the practice is sold, the realized value of such a sale is fully paid to the dependents. In some cases, the guardian is also given a share to encourage the guardian to safeguard the assets. The whole objective being that the practice should continue to remain intact.
Why has there been no mechanism in India for succession planning for IFAs?
As in any industry, many things start taking shape with longevity and maturity of the market. Today, there is enough for us to draw upon from different parts of the world when it comes to succession planning for IFAs. I can only say that we are very happy to be the first to talk about this in India and also put together a mechanism to implement succession planning via market place model.
To understand the importance of succession planning in an advisory business, I would also urge every IFA to buy and read the book written by David Grau – Succession Planning for Financial Advisors: Building an Enduring Business
What is the downside of not doing succession planning? How will it affect investors and the IFA's family and employees?
Without a proper succession plan in place, your practice would undergo gradual attrition in your absence. Many decades of hard work that you put into building relationship with clients and manage their wealth must definitely be followed through with a proper handing over to an equally, if not more competent IFA.
A customer’s financial goals is a continuing journey. If something interrupts this journey, the downside is – the client loses a person who was guiding him, and while he wanders lost in the jungle, he becomes a perfect target for hyenas to pounce and take their pound of flesh.
As far as employees are concerned, I think we are yet to see many IFA firms with such employees who can replace the founder. It would be a huge bonus if any employee can be nurtured to slip in to your shoes but there is no way you can find a replica of you. Therefore, you must be willing to make compromises on who would replace you.
Who can use this platform? Is this platform only meant for your sub brokers?
Let us start with the end goal in mind - we want the customer to experience a seamless transition. We want the dependents of the IFA to benefit from such smooth transition in such a way that the ongoing income is not fully compromised. Therefore, the marketplace is open to all those who want to benefit from such transitions. It is not just for mutual fund distributors, it is open to SEBI Registered Investment Advisers too.
Why aren't you charging any fee for this service? How will you make money out of it?
I had already mentioned that this is a natural extension to the various service value adds that iFAST brings to IFAs. I am reminded of Robert Kiyosaki. We see that clients and IFAs will see value in what we are putting together. And for us, our value comes from the dreams that get achieved. This is not for money, this is for an enduring ecosystem.
How do you evaluate the intrinsic value of an advisory business? What are the parameters to evaluate an IFA business?
The basics of any valuation exercise apply to valuing an advisory business too. It all begins with the estimation of the cash flows and then trying to establish what could be the present value of all those future cash flows.
Here, if you connect cash flows to an IFA business – it would be the upfront commissions, trail commissions, fees from clients, any other referral fees and so on. To determine the life of the asset (the asset being the investments of customers that yield the fees/commissions), there would be consumer demographics, time to goal of the investments and so on.
Relative valuation is another approach. It is estimating the value of an asset by looking at the ‘comparable’ assets relative to common variables like cash flows, earnings, book value and the such. Here, the platform can be very helpful as it carries many such comparable assets.
What can IFAs do to increase the valuation of the advisory business? Are there any qualitative factors that can help them get a higher valuation?
If an advisory business has to benefit from better valuations, it has to focus on better cash flows, longer life of the assets and a good mix of customers so that there is no concentration risk to these cash flows. These are just for starters. The whole aspect of valuation is a lot deeper. That calls for a separate discussion altogether.
Have you back-tested the valuation of advisory business. How many distributors have used this platform to check their valuation?
Before I answer your question, I think it is equally important to bust certain myths about valuation. I have learnt each of them from the writings of Prof. Aswath Damodaran, who is an authority in this subject. There are no precise valuations. All valuations are biased. Simpler valuation models do much better than complex ones. He quotes, remarkably, that one’s understanding of a valuation model is inversely proportional to the number of inputs required for the model!
At iFAST, we have already been part of a few scenarios in the Indian market itself. We have had cases where multiple individual ARN holders wanted to merge and form an LLP/private limited company. We have also had cases where there was a split of the private limited company. We have had cases where individual practice transitioned completely into a private limited company (note here that it still brings in valuation but there is no new buyer per se).
Over the last two years, we have seen close to 20 such cases involving about 50 ARN holders and a few RIAs. Transactions need not always be cash based because except in one case, the existing practitioner proposed to continue in the practice even after the transaction and therefore, they were happy picking up non cash component (equity shares in the new company) instead of a cash based remuneration.
