The continuity of their financial journey and the responsibility of guiding them is a very key element to our customers' (financial to say the least) future. Every solo financial practitioner would one day have to bequeath his clients to someone. That answers Why should you do it! This is how we set off on our journey in the last article I shared on Wealth Forum (Click here).

In this real life scenario, we would get to know how three IFAs decided to come together to set up a private limited company and their journey towards setting that up, and thereafter running it.

(Name, location and other personal details have been deliberately withheld as the intention is to provide you with lessons learnt from such experiences).

When I got to meet them for the first time, each had his own sole proprietorship concern. One of them had been in the industry for over 15 years, the others not too far away… more than 10 years. Two of them were certified financial planners as well. The third was almost about to become one.

Reasonable amount of assets in the mutual fund industry, some good clientele both in insurance and investments side, and the best was - there was one family member in each of their homes who was willing to take up the responsibility of managing customer relationships should something unfortunate happen to them.

If you really think about this background - everything looks fine - decent amount of assets and income, good clients, own practice and back up from immediate family. The reason why this experience stands out is because despite such a background, the three of them decided that going alone is not the way forward. They told each other "we have to think of how we can collaborate"!

Initial days were scary

Each person started asking a question - what is it that I can do better than the other, what is it that the others can do better than me? They put that down in writing. Shared it with each other with an intention to not only show what they are good at, but also motivate the other person by acknowledging his strength. That was for starters. What followed were tougher questions. Each person had to write down what are their worries if they were to come together. They also had to write on the other side of the table, what are the advantages that he sees if they come together.

This was a very important exercise. The quality of this exercise was determined by the openness of the participating IFAs. The three of them actually came out with a no-holds-barred set of worries.

Typical concerns were

1. What would happen to my clients once merged? Will I have to hand over them to the new entity and would they be allotted based on some other larger arrangement?

2. What would happen to my revenue - as of now, I take everything home. Will I have to leave some for the company? Or will the company keep a lot and give me only some?

3. What would happen to the costs - as of now, I control all my costs. In a joint environment, I will have to either agree to certain costs that I don't approve of or I may not be able to get money from the company for certain costs that I genuinely believe one must incur!

4. My identity - my brand - I have been nurturing this for more than a decade. How can I say that I will no longer use that name? Would any other name be as strong as what I created over so many years?

5. What if after getting together, things don't work the way I foresee? What if we have to part ways? How will that affect me and my future?

Each of them was genuine concerns. Straight from the heart! There were other administrative and operational questions. But these were the top five.

The mess in the middle

Three people, three different locations within the same city. A running practice. And clients calling, markets moving, transactions happening… all of it had to be taken care and yet, time had to be found to think about answers to these important questions. If they weren't answered, the effort would die a natural death.

Not all three would demonstrate the same level of enthusiasm to discuss the matter. This makes the most enthusiastic person feel that the other person is not interested! It makes you think that if the other person is not so bothered about this, why should I be the one racking my brains to answer these questions?

You decide to meet frequently, but as it always happens with us, something will come up either at home or with our clients and the meeting doesn't take place! Overall, messy!

However, one person held fort. He decided that he would ensure the meetings would happen, and if it had to be postponed, it will be diligently followed through until discussions on these key questions were completed. This person eventually emerged as the Managing Director of this company.

The conversations were tough. Many times, the answers were confusing. This is where I had a chance to get involved in many a telephonic rounds. It is important to have a neutral person to assist the conversations. And such neutral person should have a fairly high acceptance among the parties planning to come together. I would say, I was privileged to be part of these messy conversations.

Before answering the questions, the business model of the joint entity was put together. They had decided to become a wealth management company and to take up the SEBI registration for Investment Advisors. They had agreed to build a business with the foundation of financial planning for every client that they would bring on board. Those who didn't want planning services, they decided to keep them lumped together with one of their next generation family member. He would be given charge of execution services. This prompted another discussion - we need to get our family members involved too.

They ended up having a meeting of all their family members to share with them that the three would join together to form a company. It was essential for the next round to take place.

Clarity starts emerging

On clients, each party decided to segregate clients on the basis of who they want to retain in the new business model. Clients not fitting the new business model were going to be humbly turned away. They went on to segregate clients into advisory clients and execution only support clients.

On costs, they agreed that there would be one common office and since each of their offices wasn't spacious enough, they decided to get a slightly larger floor space and lease that for the new company. They agreed that the total costs of running the company would be the equal responsibility of each of them.

On revenue, they agreed that each person should commit to a base minimum revenue generation. Anything in excess of that would be welcome. So, if IFA - 1 generated 100 as revenue, IFA - 2 generated 200 as revenue and IFA - 3 generated 150 as revenue, they agreed that 2 and 3 will take home the extra revenue as performance incentive. IFA 1 won't get any such incentive.

On the identity, they all agreed that coming together is a new beginning. Hence, a new brand will be created. The company's name would also be carrying that brand.

On the key issue of termination - they agreed that either clients can be taken back from the company or the shares can be sold off or a combination can be worked out. However, what was really heartening to note was that any new client that would be onboarded after the company was set up, would always remain the client of the company irrespective of who solicited that customer.

Finally, the matter of ownership - which was deliberately kept to the last. How to value each practice? How much would be the shareholding of each person in the company based on the practice value? If in future, the under or over performance brings disparity in clients and assets, how would that get adjusted in ownership?

Valuation of individual practice was a black box to all parties! Until this instance, it was only theoretical knowledge with me too! We all went for our first attempt at doing something!

While each practice was valued, I was really surprised at the decision taken by the three of them - they said each will become an equal share holder. They didn't care if one person had more assets and clients than the other. They didn't care if the practice valuation I gave them would bring out some ratio like 15:50:35. They went ahead and stated it shall be equal!

Beautiful towards the end

What was sacrosanct in this decision was the fact that they wanted each person to feel equally involved and to be an equal entrepreneur. The spirit of entrepreneurship was equal in all of them. They wanted share holding to be that way! Once this was decided, then, it set the ball rolling almost instantaneously.

The capital was brought in as cash. The company was incorporated and the SEBI registration for Investment Advisory license was immediately actioned. The company needed a minimum net worth of 25 lakhs to meet this criteria. It was met!

Clients were onboarded on the platform. Each IFA had his clients transferred to the platform. Partial transfer of assets took place from their ARN to the platform ARN and the clients were given login ids to access their portfolio information.

Once the company was formed and a new company ARN was allotted, then, within the platform, the clients were assigned to the new entity. All client logins remained the same. Whereas, the front end branding for each of them on their login page, reporting page etc changed to the new company that got the IA license. Trail continued to be paid on all assets despite all these changes.

Running the new entity

Each of them was directors of the newly formed company. The MD took the lead in marketing and operating matters. The two others decided to dedicate maximum time towards financial planning and client engagement. Their next generation / spouse who wanted to join the new company were brought in as consultants. They were assigned clients based on their capabilities. The platform was enhanced to provide individual performance reports - clients, assets, revenue and the such. The reports were used to define the performance linked take home for each party. The cost of running the company is being met from the initial capital that was infused.

Conclusion

I realized that we try to find the ideal match. We want somebody who thinks like us, has similar AUA, has similar revenue and pretty much, if you think deep, we want somebody exactly like us!

The reality is, that never is for real! In search of the ideal, we forget what can be optimal. If the three of them went in search of the ideal share capital split, they would still be laboring on this issue even today. Money means a lot when it comes to practices merging together. But sometimes, that takes a back seat to the spirit. So, this experience that I have had shines for the first ever valuation exercise that was done where it was just so easy for everyone to get ahead in life by telling the other - we start as equals!

Ownership and performance are two different things. Practitioners will do well in treating them different. When you own something equally, you can naturally expect equal commitment. After you set up your company, the performance of each director may vary - but that can certainly be addressed by applying appropriate managerial remuneration policies. Share subscription agreements can have enabling clauses to ensure that nobody comes in and then, does zero contribution yet remain a shareholder. Theoretically, there could be many such risks. But in practice, if you know that if the intent is right, one must move ahead in life!

Many a time, we look at platforms as transaction portals! It is my duty to bring about awareness in the market that platforms are beyond transactions!

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