Paul Barrett says that over the past 12 months or so he has seen two distinct and noticeable changes in the market for financial planning practices.

Since the beginning of 2015 Barrett’s AZ Next Generation Advisory (AZNGA), backed by the listed Italian fund management and financial planning company Azimut, has spent about $20 million acquiring 51 per cent stakes in seven financial planning businesses.

The most recent – RI Toowoomba – was announced late on Monday night.

“There are two major things I’ve observed,” Barrett says.

“One is regarding the market for advice practices, the other is regarding the practices themselves.

“On the first point, it seems to me that a number of players have decided that ownership of advice firms is a sensible strategy, and you’ve started to see quite a bit of competition in this space.

“You saw Perpetual make an announcement of an acquisition this week; Advice389, which is the Countplus business model; Fitzpatricks has been busy; there’s an American company called Focus Financial Group here; there’s also a lot of activity in the small- to medium-sized practice space, where they are themselves quite active in buying practices.

“So it seems that financial planning practices themselves are being acquired. When you talk to brokers – and we have done a fair bit of work with a number of brokers, people like Chris Wrightson [of Centurion Market Makers] and Jason Phillips [of JNP Capital], who are in the business every day – and they appear to be very busy. There seems to be a lot more activity.

“On the advice firms themselves, once you own them and partner with them, the key topics of conversation fall into a couple of areas. Firstly, efficiency – I’d say at least half of my time spent with the firms we are involved with is on efficiency initiatives and looking at ways to improve the way things are done. And ultimately it’s a very consumer-centred conversation because you’re looking at becoming better at dispensing quality financial planning advice. So it’s really consumer-led, the efficiency discussion.

“The second topic is profitability. Firms are less focused on some of these old measures of success, and are now firmly focused on profitability and sustainability. That’s a change, because not that long ago there was a certain emphasis on selling, there was a certain emphasis on recurring revenue and more old-school-style measures. Today, it’s a profit focus.

“They are looking at efficient businesses that are profitable and sustainable. That for me is quite noticeable, being in these firms, that that’s how they think and that’s what they talk about.”

Not paying over the odds

Barrett says increased interest in financial planning practices has not necessarily led to AZNGA being forced to pay over the odds for the businesses it has acquired. He acknowledges that the approach AZNGA takes means that it does pay more for practices it buys than if it were acquiring businesses that were up for sale as part of an owner’s exit strategy.

“We’re operating in a certain sphere – taking controlling stakes in growing, successful firms,” Barrett says.

“When you’re taking a stake in a growing firm, and with proprietors on average a little bit younger, you have to be prepared to pay a little bit more.

“There’s the market we’re in, and then there’s the market where you’re buying businesses that are for sale. If you’re buying a business that’s for sale because the proprietor is trying to exit, retire, then you’ll value it differently. There’s quite a difference in valuation methodology between how we’re looking at partnering with firms, and how you might partner with someone who’s retiring.

“If you’re buying a business that’s for sale you’re taking a right-now, two- to three-year view, and you’re more likely to be paying a multiple of recurring revenue, or EBIT [earnings before interest and tax].

“It’s a different methodology and naturally a slightly different result if the proprietor is going to be in it for long-term, growing their business with you in partnership, then you’re going to share more value because you’re going to create more value.

“I suppose that’s a good way to look at it: we’re a ‘growth’ investor; whereas if you’re ‘value’ investor you’re probably looking at valuations differently.”

Barrett says it’s impossible to say how much more AZNGA will spend acquiring the remaining 49 per cent of the businesses it has acquired because those businesses will grow over the coming decade.

He says AZNGA will continue its current rate of acquisitions for at least the next year, but will also begin to focus more closely on assisting its practices to improve efficiency, as well as providing capital to help those funds with their own expansion plans.

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