Average client age – doing nothing is not an option

Your clients could dictate when is the right time to sell

There is a common misconception amongst IFA business owners that a more mature business automatically creates a more valuable asset at the point of sale. However new research from Fairstone, one of the UK’s largest Chartered financial planning firms, is a wake-up call for the industry.

Fairstone’s Chief Commercial Officer Scott Hopkinson comments.

Many Independent Financial Advice (IFA) firms believe the value of their business is constantly increasing, as their expertise and reputation within the market grows, and this generally holds true.

Though if this view coincides with the trend that as a business matures then so does the average age of the firm’s clients, then there may be a nasty surprise in store. Following this trajectory, you would assume that a well-established and consistent client base would result in ever-increasing revenues – moving away from initial fees and new business often associated with the on-boarding of new and younger clients, towards more mature clients who have accumulated significant wealth.

However, research conducted by Fairstone challenges this sector-wide held misconception; the harsh reality is that maintaining a static client base with an average age in excess 60 is not creating the commercial nest egg many believe it will.

Consequently, many business owners who wrongly think an ageing client base is creating a consistently growing and maturing asset for them, are failing to understand the real value of their company. Also, the gap between the perceived value of businesses and their actual value can be large, leaving business owners at a real disadvantage when it comes to winning over a potential acquirer.

Our research was centred around client age profiles and shows that a client’s economic value peaks when they are 55 years-old and that beyond 60, on average the total level of income from each client actually declines by 7% year on year.

Therefore, fees arising from client activity are at their most valuable when the average client age is nearing 60; this is the point at which an advisory firm garners the most value from their embedded relationships.

After that point, without a sufficient new business pipeline of younger clients to counterbalance this effect, the client bank essentially becomes a depreciating asset. Typically, beyond the age of 60 clients move into decumulation, new financial planning requirements become fewer, portfolio management focuses more on consistency of returns and income and as a result average fee generation per client starts to decrease. Adding to this dynamic is the very real impact of clients passing away when they become more elderly.

There are a number of reasons for this decline, not least the fact that clients beyond the age of 60 start to rely on the assets which they have amassed over time to maintain their lifestyle. In addition to this, older clients also tend to shift to lower risk solutions, which will slow the growth of the value of assets. Taken together, this will lead to a significant decline in both new income and recurring income and therefore the total value attached to a client bank. Clearly, this will have a significant impact on the attractiveness and value of an advisory firm to an acquirer.

This research should act as a wake-up call for the industry at large as many advisers are simply not looking at the average age profile of their clients. By not doing so, they are ignoring the fact that after a certain point, the revenue from their existing clients will reduce, year on year. This is particularly pertinent to businesses which are looking to sell as in simple terms, without focusing on generating a stream of new clients earlier in their wealth accumulation phase, they are effectively overseeing a depreciating asset.

Pertinently, our research – which is a result of looking into data from over 50 firms – also reveals that by recognising the impact that client age profile is going to have on a business, pro-active steps can be taken to avoid the downturn.

Finding the ideal age profile is important as it allows the owner to operate the business with efficiency and profitability, ultimately increasing the firm’s future value in the eyes of the acquirer market.

In a client’s early years, when accumulation is the main aim, the income generated from initial fees exceeds that of recurring income. However recurring income increases rapidly between the ages of 35 and 60.

Fairstone’s research shows that both new business and recurring income peak when the client reaches 60 and after this age, both income streams begin to steadily fall as the client enters decumulation.

Therefore, in terms of a sweet spot for IFA and wealth management firms, the ultimate time to sell a business is when the average age of a client base is around 50 years old. This places more value on the business as the acquirer has more time to achieve a return on their investment before income naturally declines without intervention, which in turn should place more commercial value on the firm.

As part of our proprietary Downstream Buy Out (DBO) proposition, we work with IFA businesses to maximise their value prior to acquisition. By engaging with business owners and supporting firms with the recruitment of younger advisers and the introduction of steady volumes of new clients from our digital marketing channels, we have helped businesses to bring down the average age of clients, thus increasing the long-term value of the firm.

Essentially the message for the sector is clear; there are three ways in which a business can maximise the value of their firm to an acquirer. Firstly, sell the business before the average age of clients exceeds 60, secondly hire younger advisers to attract and service younger clients well before any planned sale and finally, take steps to tangibly reduce the average age of your clients.

By taking early action, business owners can turn around an unsustainable downward trajectory and ensure revenues remain at healthy levels, and ultimately achieving optimum sale value that recognises their years of hard work and endeavour.