Financial planning businesses are defying the doomsayers by retaining their value in the face of the Future of Financial Advice reforms (FoFA), which many had predicted would be a catalyst for a mass exodus.
While this is partly due to the industry’s gradual acceptance of the new regulatory environment over the past two years, it has been aided and abetted by the government’s watering down of some key elements.
John Birt, principal of consultancy Radar Results, said a survey conducted by his company in mid-2010 reflected the shock that the initial FoFA reforms had on financial planners with 24 per cent of those polled saying they would leave the industry, sell part of their business or retire.
“It was a very emotionally charged time,” says Birt. “Planners are more acclimatised and relaxed now and many of those who were looking to leave are now adopting a wait-and-see approach.”
The prices paid for a financial planning (FP) business are firmly in the spotlight at the moment, whether a vendor planning to sell, a prospective buyer or a licensee.
“Naturally, everyone agrees that financial planning businesses reached their pinnacle just before the GFC in 2007/2008 and that since then the prices have been trending down,” says Birt.
“However, the FOFA reform hasn’t had the impact on FP values that everyone thought it would, mainly due to the government’s watering-down, and therefore, FP values have now stabilised.
“I have even been told that the value of FP businesses or client registers may even increase from now on. I’d like to know on what basis and why. Grandfathering has been mooted as a reason; but haven’t we always had grandfathering?”
Birt does not believe that valuations will drop further in the short-term but believes the rule-of-thumb that all financial planning businesses sell for around three times recurring revenue (RR) is absurd.
“Every FP business is different; and they all have their own unique aspects, both good and bad,” he says.
“In Australia, prices paid for FP businesses during 2011 were in the range of between 1.7x to 2.9x RR.
“However, there would also have been the odd sale in the low 1x region, and possibly a sale in the mid 3s, primarily due to problematic or unique issues surrounding those particular transactions.
“If one were to generalise, though, the majority of sales are between 2.1x and 2.8x RR, depending on the quality of the business, averaging around 2.5x RR.”
In summary, Birt suggests a below average business would sell in the low twos and a good quality business would sell in the high twos.
How can one survey conducted in mid-2010 provide any genuine clue to valuations as we enter 2012?? Projecting those valuations to the FoFA story, which hadn’t even been revealed in any reliable form until mid-to-late 2011, is stretching a very long bow.
There’s another reason why valuations haven’t dropped ‘as expected’. Due lack of organic sales (i.e. little real new business enquiry) for most investment/superannuation based financial planning firms, they are seeking their ‘new’ business by buying someone else’s client base, potentially wholesaling the offering (i.e. reducing the rate the clients are paying on ‘retail’ offerings to a more ‘wholesale’ platform rate) immediately making gains for them and (sometimes) the cleint and then holding on waiting for a rosier future sometime (and hopefully the 12% super contribution by 2019).
I’ve little doubt as consumers become more and more aware of the amount they are paying year in year out, the biggest drop in valuations will occur on either the first or second anniversary of FOFA’s implementation when advisers have to opt-in (or withstand the inevitable fierce marketing on the back of buses by then which will enticing people onto ‘honeymoon advice rates – no charges for first two years’ type advertising getting people to opt out). For most transactional financial planning firms expect valuations circa 1.0x – 1.5x within four years.