Corporatising your business model

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TOWER's Michael Coote looks at how advisers can increase the value of their business by using a platform such as a master trust or a wrap account.

Monday, August 23rd 2004, 7:37AM

by Michael Coote

Corporatisation. Within the context of the financial planning and advice industry, the word “corporatisation” refers essentially to basing your practice around investment platforms (wraps and master trusts) which offer a well-researched, compliant and defensible universe of product choices and portfolio options by which to rationalise client services.

However, the ramifications of corporatisation go beyond the way in which clients are advised and invested, and extend to enhancing the sale value of advisory businesses.

Valuing an advisory business for sale can be difficult due to a number of factors. For example, an excessively wide range of investment products may have been variously recommended to clients over time and may have resulted in a seemingly erratic diversity of investment portfolios. Determining the value of a diverse and somewhat disparate investment range is more complex and difficult to ascertain than a more disciplined controlled investment practice.

A good quality investment platform can increase the value of your business.

Take a transaction-driven stockbroker’s client portfolios. Such portfolios often reflect whatever was on sale and clamouring for attention at the time the client had investable funds. They often show considerable overlap of investment exposure, may include a mixed quality of investments, or have had little attention paid to effective diversification across asset classes.

The result? Difficulty in establishing the true overall risk/return position relative to client needs.

This sort of portfolio construction leads to a book of business that is difficult to sell to another adviser because it is not rationalised - every portfolio would have its own story to tell. For an incoming adviser this may create a lot of uncertainty surrounding unquantifiable risk in the practice and would require extended down-time in getting to grips with the case of each and every client and their highly-differentiated portfolios. And the longer a new adviser takes to come up to speed with client records and the reasons for why individual portfolios differ from others, the greater the risk of client loss along the way. That risk is reflected in the sale price of the practice.

Bringing in new advisers to your practice can be time consuming and add to business risks and compliance costs. Using a quality investment platform can help reduce the risk and training time required – helping you realise business growth benefits quicker. It can also can minimise the differences between individual client portfolios, essentially “cleaning up” your business for prospective buyers and making it easier to bring in new advisers.

Corporatisation reduces potential compliance issues

Compliance is another area where practice value can be undermined.

In New Zealand compliance is tightening up at the regulatory level while at the same time its reach is increasingly extended.

Progressively, every aspect of an advisory practice will come under the compliance microscope from regulators and potential purchasers - and the less rationalised and systematic a practice’s processes and procedures are, the lower the end value the practice will have to on-sell.

Indeed, the longer non-compliant aspects of a practice are allowed to drag on, the greater the likely acceleration rate of practice value deterioration.

A new adviser who purchases a practice that is patchy on compliance will have to divert a lot of time and energy away from servicing existing clients and prospecting for new ones while fixing up any compliance issues.

Non-compliance in the business will inevitably impact on any final price an adviser will be willing to pay.

Corporatisation helps strip out business limitations from a practice. By imposing standardisation of process and procedure at every level – from the front office, through to the middle office and into the back office – the business is made logical, transparent, predictable, and perhaps most importantly, scalable in a way that less rigorously managed practices are often not.

A quality investment platform will ensure, in relation to the couple of examples given above, that client portfolios are readily understood, explained and defensible, and that compliance is operating correctly throughout the business.

An incoming adviser who acquires a corporatised practice has fewer potential landmines to step on in the path to success and, rationally, will pay more to obtain the business.

Thinking about the cashed-up value of your business? Corporatisation can help.
Consider this, “What is the retirement strategy for those who earn their livings advising on retirement strategies?”

If you’re considering exiting your business, perhaps for retirement you need to think about at least two inter-related objectives so you can exit in an orderly fashion and obtain the maximum value for it. If you’re at this stage of your career and you’ve not already done so, perhaps now is the time to start the process of corporatising your business with a view to meeting these objectives.

Sale of your practice in the short term is not the only reason to look ahead to increasing its potential exit value. Putting a sound medium or longer-term corporatisation strategy in place enhances future market appeal (and hence value) of a business – and gives the strategy time to work its wonders.

For example, imagine you plan to leave the industry in two years’ time. You could use that time to adopt an investment platform of industry best-practice standard and move all clients across to it.

Choose a platform which offers quality investment products, researched and defensible portfolio templates, and a universe of discretionary investments not so extensive as to result in vastly differing portfolios.

The platform should come backed up with high-compliance levels of service standards applicable as required in the front, middle, and back offices. Tidied up in this way, your practice will be ready in two years’ time to be sold “off the shelf” to a purchaser at a maximised price.

Even if you’re not yet thinking of retirement or selling up - consider what may happen if you become incapacitated and need to bring in a manager, or have your colleagues take over the management of your book for a period of time. Again corporatisation, through the use of an efficient platform, makes this a lot easier and reduces risks and costs

By contrast, lack of corporatisation may make a practice less saleable and difficult for someone to step in for a period of time should you need to take time out of the business.

It makes good dollars and sense to corporatise your financial planning or investment advisory practice as soon as possible.

Corporatisation will help preserve and build value within your business for the eventual day when you leave the industry, either permanently or temporarily - regardless of where you currently are in your career.

Michael Coote is the national manager mezzanine clients for TOWER.

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