 Although
the average age of Advisers has dropped
slightly in recent years, it is still
firmly ensconced in the 50’s
and recent experience and discussion
has shown increasing activity in the
mergers and acquisitions market, as
IFAs
seek to either consolidate their businesses
and share their cost base or look
for an exit route. In either case,
a number of factors will influence
the value put on a practice, including
renewal commission stream, funds
under management (and more importantly,
which of those funds are producing
trail commission) and ready access
to detailed management information
(MI).
Much, if not all of the above will
be dependent on detailed analysis
of commission information, yet it
is startling how many firms reconcile
commissions either on spreadsheets
or even using manual ledgers. This
provides no correlation between the
clients, their holdings/ portfolios
and in many cases only applies to
initial commission. Renewal commission,
one of the key drivers of value in
an IFA business, is to all intents
and purposes ignored.
In part, this is due to the sheer
time required to manually reconcile
large numbers of very small items
of commission. Indeed, the time taken
to individually reconcile an item
of renewal can cost more in time than
the value
of the commission itself! As a consequence,
many firms simply accept renewal commission
on an accruals basis, reconciling
initial commission individually and
not reconciling renewals or, at best,
reconciling as a single ‘batch’
entry.
This not only removes any chance
of analysing commission by client,
product, source or Provider, but also
takes on faith that the Provider will
pay the due commission accurately
and on time. Basing the future value
of your business on inaccurate and
missing information can hardly be
ideal, yet a large majority of cases,
the commission expectation will not
have been entered, particularly for
historic or legacy business. Indeed,
for many
firms, renewal is being received for
contracts or even clients for whom
no record exists within the back office.
Electronic Commission Reconciliation
(EDI) can streamline this process
for the directly regulated firm, receiving
commissions directly from the Product
Providers. An electronic version of
the commission statement is received
directly into the Client Care Desktop,
where a series of matching routines
attempt to reconcile the commission
received against an expectation set
up within the system. Providing the
receipt is within tolerance levels
set by the firm, the receipt will
reconcile automatically, updating
all reports and MI at the same time.
This alone can save literally hours
of time every month, removing the
need to manually reconcile each item
and then using that information to
produce reports, commission statements
and analysis. However, it is where
the amount is outside the tolerance
levels, or the matching record cannot
be found, that the system can truly
add ongoing value. In this scenario,
the system will identify the records
which it cannot match and reconcile
exactly and the specific reason for
this mismatch. This could include
that the commission is outside the
preset tolerance levels – i.e.
that
the amount paid is over or under the
amount expected by more than a pre-defined
marginor is a over a certain amount,
that the policy number does not match
or indeed, that the policy has been
entered twice. Depending
on the nature of the exception, a
range of options exist, including
to create a matching record against
which future payments can be reconciled
automatically. This is particularly
powerful in the context of renewals,
where the commission, and indeed in
some cases, the client/policy may
not exist within the system. Once
an item has been successfully reconciled
once, there will be no need to reconcile
that item manually again, unless the
amount paid exceeds the tolerances
and it removes the element of faith
from the payment of commissions by
Providers.
The time saving that the use of EDI
can offer is immense, such that in
some cases it makes it one of the
single most powerful pieces of technology
available to an IFA practice.
Nevertheless, the other advantages
of EDI cannot be ignored. Even ignoring
the value of such accurate MI from
both a business management and TCF
viewpoint, the increasingly automated
reconciliation of all forms of commission,
including renewal, provides a detailed
and accurate assessment of the current
and projected income of the business,
which can only enhance the potential
sale value.
However, for the firm which is seeking
to acquire businesses, which perhaps
do not have a comprehensive and populated
back office system, EDI can potentially
add even more value. Importing client
and holdings
data directly from Product Providers
to prepopulate either a new or existing
system is already available, but then
utilising EDI to effectively update
and cleanse the commission position
of the acquired business will allow
a true picture of the nature and value
of the client bank and identify opportunities,
such as re-registration of assets.
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