Opportunities to create value in financial planning practices exist irrespective of whether a practice is self-licensed, operating under a non-aligned licensee or part of an institutionally owned licensee, according to Tony McDonald, a director of newly formed T&C Consulting.
McDonald, the former managing director of Snowball Group (since purchased by SFG Australia), and who founded T&C in partnership with Carl Scarcella, says that the immediate impact of the Future of Financial Advice (FoFA) reforms has been to concentrate planner numbers under institutional licenses.
McDonald says this is an understandable reaction, but there are a number of factors that make him believe that the “disaggregation” of financial planning is not only possible, it’s an attractive alternative.
“There are opportunities to create and realise sustainable value, no matter what angle you come from, but it will only come if you are absolutely focused on your market positioning – basically niche or large and vertically integrated,” he says.
“Finding yourself in no-man’s land is not an option. Pre-FoFA valuations based on multiples of profit, not recurring revenue, are achievable but only if the positioning is clear and sustainable.”
Technology and other solutions are emerging that enable small licensees to successfully compete in niches and to achieve economies similar to institutionally owned licensees in that space, according to McDonald.
At the same time, new customer segments are emerging as consumers become more informed about financial planning and more discerning about the services they want.
Inversion therapy
McDonald says that regardless of the licence structure, financial planners must now receive the bulk of their income directly from clients, which has “inverted the value pyramid” that existed pre-FoFA, when product was the main source of income for many. Now it’s about strategy first, then implementation and product last.
“FoFA is taking away some of the product margin the big boys were enjoying,” McDonald says.
At the moment we’re probably at the zenith of aggregation; I think we’re going to start turning to disaggregation even if slowly at first,” McDonald says.
However, McDonald reckons practices will need strategic guidance and matching infrastructure to help them create the greatest value, and new service providers will emerge to support them.
“There will be new models and new-age dealer groups that spring up,” he says.
“When the pyramid gets inverted, the dynamics and valuation metrics are very different. Will financial planning practices ever get four-times recurring revenue again? Probably not. Will the valuation of the industry come back to more normal valuations? Yes. Sustainable value from growing profits will still reward planners, but it will be more about times EBIT and quality businesses with a clear strategy.”
“Carl and I talk to family offices and private equity firms, and they ask the same question. How do we value wealth management businesses going forward? Normally is the answer. Outside the listed space, where listed-market and scale multiples apply, practices may yet get the same result, but only if it’s four to six times profit.”
“At T&C, we call ourselves value amplifiers. Our job is to work hand-in-glove-with wealth management businesses on strategy, governance, value creation and value realisation on disposal.”
