IDAD’s Managing Director, Clive Moore, shares some thoughts on how to boost the value of an advisory business in a way that benefits clients as well.
I’ve been working with investment advisers for over 30 years, but I like to think I remain curious and adaptable, with a willingness to change my behaviour in the face of new (to me) information and ideas. It doesn’t mean I don’t grumble about change though – I’m still a man of a certain age! 2025 has already delivered a bit of an epiphany for me as the result of a discussion with our new CFO, who has spent the last few years working with some of the larger consolidators in the UK. Namely the importance and value of transactional income to advisory businesses.
The UK has seen huge levels of consolidation of advice firms, partly as a result of advisers retiring, or coming close to retirement, but also because of the demand from Private Equity investors hoping to access the returns available in the sector, especially if these returns can be increased by efficiency savings and a sharper focus on profitability. This trend is pretty well entrenched, and still growing, among international advisory firms too. The typical valuation methodology is still based on EBIT (Earnings Before Interest and Taxes) multiples – in the range of 7-12 times this number.
Those firms that generate transactional income on top of their annual fee income will have a higher EBIT. This normally takes the form of an initial fee for advice or for arranging an investment. At IDAD, a lot of our business (selling fixed term investments) generates advice or transactional fees, typically advisers in the UK charging around 3% and those outside the UK able to take commissions of 4%+ in some cases. In practice, this takes the form of client portfolios consisting of 60-80% in a Central Investment Proposition (e.g. MPS/DFM) and the rest in ‘satellite’ investments, including structured products.
Most DFMs in the UK seem to have allocations between 10-25% of portfolios to structured products (including structured product funds) – Family Offices and Private Banks can have significantly more allocated. The principal reasons are pretty straightforward – great and efficient risk-adjusted returns. But there are plenty of ancillary benefits too: for DFMs the lack of ongoing charges reduces the headline annual fee rate (for them and the advisers looking to keep costs as attractive as possible); for the Private Banks, it helps them manage client portfolios and retain regular contact with them, as well as keeping their annual charges low.
By taking this allocation outside of a managed service, advisers are able to benefit from the additional income in their business (transactional income) whilst the investors still benefit from the attractive investment profiles. As well as generating more actual profit that can be taken by business owners or reinvested to help the business grow, the increased EBIT can significantly boost company valuations – every £10,000 earned can boost the business value by £100,000.
So, in 2025 I’m changing my promotional behaviour a bit as a result of this realisation. I’ll still be extolling the investment virtues of the structured products we sell (exceptional risk-adjusted returns) but I’ll also be reminding advisers how doing the right thing for their clients can also boost the value of their business.
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