The high multiples and prices that dealer groups and advice practices have been able to attract in recent years are, in most cases, directly linked to funds under administration and/or platform rebates.
However, the writing is on the wall for rebates. This has seen competition in the investment administration space rapidly heat up in the last 12-18 months. Functionality and efficiency are more important than ever while the Future of Financial Advice (FoFA) crack down on conflicted remuneration has loosened the platforms’ hold on planners and opened up new possibilities.
With rebates effectively given a shelf life, savvy advisers have been looking for a more viable business value proposition to boost revenue and practice valuations. This has led to two key developments: the rise of private-label products and platforms, and managed discretionary accounts (MDAs)
By establishing their own private-label products, the larger boutique licensees can earn a margin on investment management and potentially administration. This is seen as a cleaner business model.
Similarly, a well-run MDA can deliver a sustainable, annuitised revenue stream for IFAs, in addition to cost benefits from greater efficiencies and improved client satisfaction. By implementing an MDA service, which incorporates many parts including discretionary investing, custody, technology and reporting, advice businesses are able to build scale quicker than through wrap platforms.
These are critical factors for business owners as well as discerning buyers.
Offering an MDA solution can be simple or involved. It depends on a practice’s current and future capabilities and goals.
Advisory firms who also see themselves as fund managers can manage portfolios inhouse and earn investment management fees. In order to do this, they must have the skill and resources to construct portfolios, research and select stocks and managed funds, and monitor and manage portfolios on an ongoing basis.
Other advisers prefer to outsource investment management.
Whatever the case, with an MDA, it’s abundantly clear how much it costs a business to provide advice, investment management, and portfolio administration. It’s also clear how much they make from each part.
It’s currently difficult for business owners, let alone potential buyers, to ascertain the true cost of administration and investment management because of volume bonuses, shelf space fees and other hidden arrangements.
An MDA can deliver a cleaner model. There are no rebates or secret deals. Advice firms can deliver a pure fee-for-service model, charging different fees based on the value of the client. In addition, attractive margins on investment management and portfolio administration can be achieved. Profits can be reinvested back into the business or passed onto customers in the form of lower fees.
Potential buyers can see which part of the business is the most profitable. They can apply different multiples to different parts, depending on where they perceive the highest value.
However, practices which run an MDA service are increasingly becoming acquirers not sellers. Acquisitions drive further scale and efficiency gains, for an incremental amount of additional work. The MDA structure can be easily applied across a client base. Once new clients are on board, investment decisions can be executed quickly without the need to refer to the client as long as the portfolio complies with a documented set of agreed investment parameters.
This allows administration resources to be deployed to other parts of the business while advisers are freed up to spend more time in front of clients.
An MDA solution can be a real draw card for principals who are planning to retire and either sell up or bring on board younger advisers as part of their succession plan.
Younger advisers are typically hungry to make their mark. They tend to be better educated. They’re not afraid of new advice models or new technology, and they can see the long-term benefits of a centralised and efficient portfolio management system.