Paul Barrett has a $100 million war chest to back his belief that financial planning can be a profitable business in its own right, rather than being a front for and propped up by product sales and distribution.
Backed by the Italian wealth management business Azimut, the former head of the Commonwealth Bank-owned Financial Wisdom dealer group and general manager of advice and distribution for ANZ says an efficient, corporatised financial planning firm can be profitable without being hitched to an asset management business.
Azimut is providing funding to Barrett’s venture, Next Generation Advisory (NGA), to provide capital to enable select financial planning businesses to grow, and to de-risk the succession panning strategies of the firms’ principals.
NGA will initially acquire up to 51 per cent of target firms over a two-year period, begin to raise its stake from year four, and move to outright control within 10 years. Barrett says he is in negotiations with potential targets and hopes to deliver the first deal in the first quarter of 2015.
“But can I say, this is a long-term project and if it takes longer, it takes longer,” he says.
Barrett stresses that NGA’s strategy will not suit financial planning business founders who are looking to sell their businesses right away.
“This is not a trade sale situation; this is not for people who just want to sell their asset,” he says.
“This is not for people looking to exit the industry tomorrow. This is for planners who see at least a decade in front of them, who want to de-risk their succession planning strategy and who want certainty.
“If you’re a successful firm and you know that you are not going to have a huge pool of buyers in 10 years’ time and you want to de-risk that and protect yourself against all the sorts of things that can happen in a 10-year period, then the way we’ve structured the offer…will de-risk your succession and give you certainty, but at the same time give you a great outcome. We’re buying it over 10 years, which means you’re going to get paid for your growth. As you’re growing the firm you’re going to get multiples in years out of that growth. It really does de-risk the whole succession journey.”
Active and engaged
Barrett says there will be lock-in clauses in the transactions, but the main thing that will keep the firms’ key people engaged and active will be the potential to share in the growth of the business during the buyout period.
“If your model works and it is designed properly, and it incentivises the right behaviours from day one to the end of the period, then you don’t need, technically speaking, restraint clauses,” he says.
“Our model puts a lot of value upfront but also keeps a lot of value in the future years, there’s always at any point in time during the journey a strong incentive for planners to stay and to be part of this.
“It’s also the culture. My experience –and there one or two examples you can point to of this in the industry already – if you can get a group of high quality people together who are culturally aligned and are heading in the same direction, you can achieve wonderful things. That’s what we’re trying to do here.”
Barrett says Azimut’s strategy is not a funds-under-management (FUM) play.
“I’ve often talked in various forums – some of them [Professional Planner] has organised – about financial planning and the need for financial planning to be seen as an end in its own right, not as a means to an end,” he says.
“Azimut get this. They see financial planning as an end in its own right, not as a means to an end. When you talk to their executives they understand that financial planning stands alone and stands separately as an end-to-end enterprise, serving its clients.
“In some countries they have financial planning firms, in other countries they have asset management capability. But they only do those two things. In some countries they do both, but they see them as separate things. In Australia, via NGA, it’s a financial planning strategy. I wouldn’t call NGA a FUM play – it’s an advisory play.
“Azimut understands that you can run a financial planning business and generate good profits and returns for shareholders, and serve your clients at the same time.
“They want to create a modern, sustainable profitable financial advice business, and they want to act in the best interests of clients – period. They do not have an asset management capability in Australia today; whether or not they do in future is anyone’s guess and it’s not something I’m concerned about today I’m concerned about an advice business today.”
Barrett says Azimut aims to acquire “high-quality, corporatised firms that will grow as the Australian wealth management industry continues to expand”.
“They can do that in one of two ways,” he says.
Highest-quality firms
“They can do a major acquisition, or they can selectively acquire the highest quality firms. If they do a major acquisition, invariably you end up buying some good assets, and you get a tail. So they want to take the approach of selectively acquiring the highest quality firms in Australia. That’s essentially what I’m here to do.”
Barrett says “corporatised” is a synonym for “efficient”, and a good measure of how efficient a financial planning business is its earnings before interest and tax (EBIT) as a percentage of its revenue.
“Good quality firms typically have EBIT ratios of between 40 and 60,” he says.
“Some of the firms we’re talking to do have ratios in the 60s.
“That number can move around a bit – they might do an acquisition, and that acquisition might lower that number for a year or two as they become more efficient post-acquisition. That’s really what I mean by ‘corporatised’.
“The principals of these firms are considering their succession needs. The real quality practices normally start thinking about that well before they need to, often a decade out. They’re still growing, but they understand they need a strategy to ensure their business assets are monetised.
“And it’s a long process. If you’re building a really large successful firm, by definition when it comes time to exit and retire, your pool of potential buyers is going to be small, because by definition you’re large and therefore you’re expensive.
“The other aspect here, of course, is talent – how do you fid the right talent to continue to serve the client. So we’re trying to solve both those things.”
Highly profitable
Barrett says the firms NGA has in its sights are generally highly profitable, but the success of an acquisition will not be judged solely on its return on equity (RoE).
“The discussions we’ve been having here has been quite refreshing,” he says.
“We’re looking at the profitability and EBIT ratios of quality firms, and we talk more about talkback periods than we do about RoE, because that’s more of a global way to look at it. Depending on the valuation, or the price you pay, payback can be as low as four years, or maybe as high as six years. We tend to look at it more along those lines.”
“When I analyse the revenue lines of these firms, the vast majority have gone from being commission-based firms to being advice-fee-based firms,” he says.
“They tend to have a fairly well-developed offer to their clients, normally segmented so you look underneath the revenue line and you see your A, your B, your C segments, and differentiated pricing.”
The structure of the advice fee varies widely, from flat fees, to schedules of fees for specified services, to asset-based fees and even time-based fees in some instances, Barrett says.
“Some clients still absolutely prefer to pay percentage-based fees,” he says.
“The clients are still in control of those fees, because they can turn them off any time, and it’s a negotiated contracted deal between the client and the adviser.
“It’s more of a mindset than a method.
Substantial revenues
“We’re talking about substantial revenues, for the most part, but that doesn’t mean we won’t consider small firms f they have good growth potential,” Barrett says.
“If you’re going to build a quality asset, you do need scale. But you also need growth, so you need a mixed portfolio. That will mean that over time we will acquire large firms, but we will occasionally acquire small high-growth firms to build out the overall portfolio.”
Barrett says NGA does not want to buy an existing licensee or a dealer group, and will remain focused on individual firms.
“When you buy a dealer group you’re buying a licensee that at times has a tenuous relationship with its planners, and at other times has strong bonds with its planners. It seems to be somewhat cyclical,” he says.
“When you’re buying a financial planning firm you’re buying something different. You’re buying a going concern that has a direct interface with clients and that, for mine, is more what we’re trying to do here. There is no plan whatsoever in our strategy to try and buy a dealer group.”
NGA will not necessarily need to obtain an Australian financial services licence (AFSL) to fulfill its plans. The change in ownership of a financial planning business, as NGA moves to full control, need not affect its authorised representative status.
“These firms are typically licensed by very reputable companies with good licensing infrastructure, and we intend to keep it that way,” he says.
“Financial planning ownership changes all the time.
“In my time running a dealer group, there were always new owners of firms. There’s always transaction activity going on. In the authorised rep agreement, some dealer groups would have provisions where they want to be notified. Some would want to approve that. You’d have different levels of approval. Naturally, if a licensee wants to approve it, we’ll go through whatever process we have to go through.
“At the end of the day, an adviser is free to chose the license they are associated with. If I’m a business owner, though, there has to be a really good reason for changing licensee, because changing licensee is not easy. It distracts you; it takes time and money.”
No competing platform
Barrett says NGA is unlikely to be considered a threat to major institutionally owned licensees because it will not have a competing asset management or platform offering.
“As a shareholder or an owner of a financial planning firm, one needs to assess the quality of the suppliers,” he says.
“Most of the major platforms are pretty robust. I say most, not all. In the long run you want to be aligned to the best you can be, and I imagine today every financial planner who is using a platform is continuing to assess the quality of that offering and reserves the right to align themselves to the best offering they can, when they need to.”
Barrett says platforms are capital intensive, large-scale IT operations, with high barriers to entry and diminishing margins.
“When I sit back and look at those two things, it’s not an attractive place to be,” he says.
Barrett departed ANZ in August 2013 and spent “a good six months off” spending time with his family and reacquainting himself with the local community at north Curl Curl on Sydney’s northern beaches – he is still coaching a local junior cricket team there – before starting to think seriously about his next steps.
“My mind got busy half way through this year,” he says.
“Azimut had been assessing the Australian market for a year or so when I met them.
Chance meeting
“It was a chance meeting. I’d been talking to private equity firms about raising capital to create a high-quality financial planning firm and a succession solution. It’s fair to say there was a mismatch in terms of timeframes and expectations when I was talking to private equity.
“Typically, the people I was talking to wanted to do something over three to five years and when you’re talking about building a quality, sustainable business, these sorts of businesses aren’t created overnight. So from my point of view I wanted an investor with a long-term timeframe.
“A friend of mine was aware of Azimut’s interest in Australia, and he introduced us.
“I reckon it took about half an hour and I understood them; I felt I had a clear understanding of what they were about, and they of me; and there was an alignment. There was a strong alignment of interests; their timeframes were long term; and, importantly, they understood financial planning.”
