In about a year’s time, Paul Barrett’s Next Generation Advisory (NGA) could be an investor in as many as a dozen high-quality financial planning businesses. The restriction on NGA’s growth will be its physical capacity to complete transactions, not the scarcity of potential targets.
Barrett will spend up to $100 million acquiring assets in the financial planning space in a strategy that sheds considerable light on just where he believes profitability resides within the wealth management industry. And it’s not with the traditional dealer group business.
“I’d say [we will complete] between six and eight between now and Christmas,” Barrett says.
“That’s what we’ve currently got in play. And then we’ve got another four to six for the early part of next year. There’s no shortage of high-quality financial planning firms who want to de-risk their succession plan, which is what we offer.”
NGA is not acquiring dealer groups and has no intention of becoming a licensee in its own right. Barrett insists that the best investment opportunities exist at a practice level – practices like Greg Cook’s Eureka Whittaker Macnaught, in which NGA acquired a 51 per cent stake recently for a shade under $10 million.
“Financial planning firms are real assets,” Barrett says.
“They are going concerns that have value, and the reason for that is the financial planning firms have real relationships with real people – fee-paying clients – whereas a licensee is a licensee entity and doesn’t actually own the client relationship.
“The strategy in the last 10 to 15 years has been to acquire dealer groups. You’ve seen institutions acquire dealer groups. And there are various reasons for that. But in my view, the asset that has value is the asset that’s closest to the client, and that’s the financial planning firm.”
Self funding
Barrett says a properly structured acquisition program can effectively be self-funding, if the right targets are acquired.
“If you look at the quality end of the market – assume for a minute we’re talking about very high-calibre financial planning firms – the profitability of those firms is very high: 40 per cent EBIT ratios; EBIT being 40 per cent of your revenue,” Barrett says.
“A 40 per cent EBIT ratio I think is a really good number. If you’re building out an acquisition strategy, then basically it’s self-funding because you’ve got such a high cash return.
“People will make observations and say there’s not a lot of money in financial planning. That’s nonsense; in the quality end of financial planning these firms are generating huge cash profits and the level of efficiency that these firms are able to get is high, even in the face of increasing regulation. The good firms are using regulation as a catalyst for change, and are looking for more efficient ways of doing things.”
Barrett says licensees and dealer groups should not construe NGA’s foray into the financial planning space as a threat. Indeed, the financial performance of many of the practices that NGA is examining is assisted by the fact that they pay subsidised dealer group fees. Barrett says he has no intention of upsetting that arrangement.
“Most of the forms of subsidisation have been banned. But one hasn’t,” Barrett says.
“I don’t think institutions should be prevented from owning dealer groups and manufacturing. I’m not in that school of thought. So long as conflicts are managed properly, those two strategies can coexist, no problem.”
Barrett says there is “an argument to say that subsidisation produces benefits to consumers, because those costs don’t get passed on to consumers”.
“And the products associated with some of these groups are quality products. If you just pick on that subsidy item you can paint a certain picture, but on a more holistic [view] I would be the last person to say there’s something wrong with that strategy.
“Advice accessibility and affordability are important issues. If consumers had to pay full-tote odds for that advice, they may not be able to afford it, they may not receive advice, and they may be worse off. So there’s arguments for and against all of this stuff.”
A clean strategy
Barrett says the NGA acquisition strategy, backed by the Italian fund management and financial planning company Azimut*, is “very clean”.
“It’s a very client-centric, no-conflict model, where we’ll have different advice firms that exist in different dealer groups; they are all good quality dealer groups; they’re all fee-for-service companies; they’ve got some grandfathered revenues – everyone has – but they are essentially fee-for-service now; and we don’t have a white-label wrap or white-label master trust or rebate arrangements.”
Barrett says NGA has taken the view that good financial planning practices are profitable entities in their own right, and are not just the distribution arm of an institutional parent company.
“At the end of the day we’ve come up with a new model, and it’s a model that reflect the fact that someone has formed a view that financial planning firms in and of themselves are valuable,” he says.
“Up until now, there has been in some quarters a view that financial planning firms are a means to an end, not an end in and of themselves.
“My view has always been that they are an end in and of themselves. Based on that thinking we’ve started to acquire financial planning firms. That’s seen as a new model. I am sure there are plenty of people out there who are saying well, we’ve been doing that for years; I do not think we’re the first, by any stretch. But that is what we’re doing, and that’s the reason why.”
Opportunity, not threat
Barrett says that far from perceiving NGA as a threat, forward-thinking licencees it as an opportunity.
“If we’re buying quality firms and one of our key value propositions for those firms is helping them grow, by giving them access to capital to grow inorganically as well as organically, there’s a benefit to the licensee,” Barrett says.
“If our firms are acquiring other firms and they’re inside the licence, the licensee is growing its number of advisers, it’s growing its profit pool that it gets a fee on.
“If I were a licensee head, I’d see this as an opportunity.”
* This post was edited on 20/5/15 to reflect the fact that Azimut is a fund management and financial planning company, not a bank.
