Falling markets fail to drag down practice values

Intuition would suggest that the values of most financial planning firms have slumped over the past few months, in tandem with the sharp decline in world sharemarkets.

A quick read of the latest Plan for Life analysis of the retail managed funds sector – which is intimately tied to the fortunes of financial advisory businesses – might confirm that diagnosis: funds under management (FUM) fell by more than 8 per cent and gross inflows dropped more than 20 per cent during the March 2008 quarter.

But the shocking FUM and flow results, it seems, have not been reflected in advisory practice valuations. Stephen Prendeville, principal of Melbournebased Kenyon Prendeville, Australia’s first consulting firm to specialise in the sale of financial planning businesses, says while the advisory market hasn’t been immune to the external ructions, prices and volumes have been steady.

“We haven’t seen a slow-down and no-one has put off a sale [because of the sharemarket fall],” he says. Prendeville says advisory firms dependent on FUM-based income have naturally seen a reduction in recurring revenue – the traditional valuation tool for financial planning practices – but buyers and sellers are putting that short-term decline in a long-term perspective.

For instance, Prendeville says rather than using the latest recurring revenue figures, many advisory businesses will use the average income over the past three years as an indicative measure of income for prospective buyers. He credits the “maturity of the buyers” as a factor in shoring up the market. According to Prendeville, buyers are not spooked by any shortterm FUM fall but are looking at the long-term growth prospects of financial planning firms for price guidance based on qualitative factors.

In this environment, he says, client retention is more important than headline revenue as an indicator of future value. “There’s only reduction in payments [from the original negotiated price] if clients leave,” Prendeville says. He says that for the time being, the fundamentals remain very much in the seller’s favour.

“There’s been no significant shift in the supply side,” Prendeville says. “And demand has increased.” However, John Birt, head of NSW firm Radar Results – which generally deals at the boutique end of the financial planning market – says the supply/ demand factor has evened out considerably since his group opened up shop in 2005.

According to Birt, today there are as many organisations looking to buy as there are looking to sell. “A couple of years ago there was four times as many buyers as sellers,” Birt says. Over the past year alone, he says, the number of sellers seeking Radar’s assistance has doubled – a rush he attributes partly to the drop on financial markets.

“Because of the downturn, some advisers are deciding to exit the business – I suppose there’s an element of taking the money and running,” Birt says. Unlike Kenyon Prendeville, Radar has picked up a slight decline in prices. Birt says multiples have “been down a bit” over the past six months as well as underlying revenue. Birt says “prices will come down” as more sellers come to the market – a trend that will be driven by the ageing of practice principals more than anything.

“A lot of advisers have woken up to that,” he says. Prendeville agrees the advantage will shift away from sellers of financial advisory firms – but not just yet. “Now is a good time to sell – there hasn’t been a demand decline yet, but you have to ask when will the supply increase… the average age of financial planning principals is about 60,” he says.

Prendeville and Birt, though, remain upbeat about the prospects for their own firms. Radar, for example, has recently opened a Melbourne office and also has offshore ambitions. The arrival of a new player in July – Centurion Market Makers – is also another good sign that the financial planning buy/sell consultancy business itself is in a growth phase.

Wayne Marsh – who along with Chris Wrightson heads up the Sydney-based Centurion Market Makers – says the firm has fielded a “significant” number of calls from both buyers and sellers since launching. “The interest has been so strong we’re already wondering how to expand the model… there is massive succession planning going on in this industry,” Marsh says.

Prendeville remains sanguine about the new competition. “It was always going to happen,” he says. “I’m just surprised that we had the market to ourselves for so long.”