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Financial advisers get a new platform

Business continuity is important as death or serious illness can put an adviser's business, and clients, at risk

iFast Financial India Pvt. Ltd, a platform provider for independent advisers and mutual fund (MF) distributors, has launched a marketplace for independent financial advisers (IFAs). This initiative seeks to facilitate merger and acquisition of IFA-run businesses, but goes further.

The company’s managing director, Rajesh Krishnamoorthy, says that personal experiences with IFAs being unable to continue their business concern due to untimely death or serious health-related disability led to the idea of such a platform.

IFAs are individual professionals who advise clients on financial planning and give investment recommendations, hence, business continuity and succession planning assumes critical importance.

Typically, there may be some support staff but the brain in the service is the adviser herself. What happens to a client being advised, say, for the last 5 years, if there is an unfortunate car accident in which the adviser loses her life; who will now take over the client’s financial matters?

This dilemma is akin to what might be faced by doctors, lawyers and other professions where the individual involved is the key for continuity.

A marketplace for IFAs

This is where iFast’s initiative comes in. “In our experience, sometimes an IFA has to suddenly withdraw from her daily responsibilities and in the worst case scenario the business is left behind with no succession plan," said Krishnamoorthy.

There are two aspects to this; first, customers continue to need advice, hence, shutting down the advisory business completely is not an efficient solution. Second, earnings of an IFA can be a primary source of income for the entire family.

The Association of Mutual Funds of India released a circular in 2013 detailing how a nominee of an MF agent or distributor is eligible to receive commissions after the demise of the said person. While this helps to an extent, if the customer moves on to another adviser, there won’t be any income accruing to the family.

There is also the matter of retirement for an IFA. It’s not necessary a family member will take over; one has to plan in advance how the business continues and who will service clients post-retirement, said Krishnamoorthy

At present there are around 1,800 advisers who use iFast.

Beyond the transaction

Although iFast provides this service only for those who use their platform, there is a wider need in the industry to think about an organised approach to succession planning and business continuity.

“Succession planning is important for any business. Just having a will in place may not be sufficient and business owners will have to think through appropriately on this matter to put in place a full proof business continuity and succession plan," said Gautami Gavankar, principal adviser, estate planning, Kotak Mahindra Trusteeship Ltd.

Analysis of a random sample of 21,000 MF distributors by iFast showed that only 4% were lesser than 30 years of age, while around 50% were above 50 years. While age itself doesn’t imply risk of discontinuity, but odds are higher and many distributors above 50 years would soon start thinking of retirement.

“Recently, I could help out with clients in the event of a peer’s sudden death, till such time a permanent solution was arrived at. It was voluntary and worked out, but such situations don’t always get resolved," said Trupti Muralidhar, managing director, BITS Portfolio Advisors Pvt. Ltd, an IFA who also uses the iFast platform In her case, she now encourages key employees to take a stake in the business to ensure continuity in her absence.

For advisers, there is no additional fee for the IFA marketplace service. The benefit of this facility is that client data would already be on the platform since it is being used by those involved in the transaction. Second, external legal and valuation experts are involved to complete the transaction, but they come at a fee.

The facility being unavailable to IFAs who are not members may be seen as restrictive, nevertheless it is a first step towards formally addressing a gap in the system.

The IFA industry is highly segmented and has many individual members. So far, there hasn’t been a formal attempt to address the issue of business transition.

The concept is viable, but what needs consideration is the valuation methodology adopted for these highly service oriented and subjective businesses.

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