AMP Financial Planning has unveiled changes to its buyer of last resort (BOLR) facility designed to bring valuations of the financial planning giant’s approximately 840 practices more closely into line with actual practice revenue.
The company plans to alter how it values practices it acquires under the facility to reflect a decline in revenue from some legacy superannuation polices as they transition to MySuper products between now and June 2017.
There will be four main changes to the BOLR facility:
- AMP will establish a transition path for superannuation policies that are to be converted to MySuper products
- The valuation of a practice’s client register rights will in future be based on “on actual ongoing revenue, not a deemed product rate”
- It will introduce service packages for ongoing fee arrangements, with details still to be agreed with the AMP Financial Planners Association
- And it will introduce revised deferred payment and client file review terms.
AMP says the changes will “create a sustainable model” for the BOLR facility by changing how it values businesses, to reflect the expected actual future revenue of those businesses. It says it will streamline customer servicing agreements following the transfer of register rights, and the changes will better align the interests of buyers and sellers.
None of the BOLR changes outlined affect practices that submitted a notice under the BOLR facility before April 27, 2016. AMP says practices that submit a notice before August 1, 2016, “will be eligible to exit under the old valuation methodology (subject to discount on ADA multiple)”.
The managing director of AMP Financial Planning, Michael Guggenheimer (pictured), says the changed treatment of superannuation policies will lead to “a reduction in value to the overall network,” and the specific impact on individual practice valuations will vary depending on the precise exposure to these super policies.
“The decision we have taken on ADAs [accrued deferred amounts, or trailing commissions] and the movement into MySuper has an impact on any practice that has these sorts of policies in its business,” Guggenheimer says.
“We don’t necessarily expect it will be a universal impact, because it depends on the level.”
Deferred payment element
AMP has also varied the terms under which it will purchase financial planning businesses, introducing a 20 per cent deferred payment element. Guggenheimer says the change brings the terms of the BOLR facility into line with commercial terms across the industry. Guggenheimer says that if AMP stands in the market as a buyer of a practice it is reasonable that the same terms apply.
“We think that aligns buyers and sellers,” he says.
Guggenheimer says the BOLR remains central to how AMP facilitates orderly sales of planning businesses within its network. However, while the BOLR facility is available to all of AMP’s financial planning practices, only “a very small portion” of transactions each year are conducted under the BOLR.
“From time to time there is not always a matching of the buyers and sellers in the marketplace, and sometimes we have to stand in the market to facilitate a retirement of a planner where we have not been able to get an appropriate buyer lined up,” Guggenheimer says.
A transition guide dated April 2016 says that the BOLR facility is “a longstanding cornerstone of the AMP Financial Planning value proposition”.
It says the valuation methodology underpinning the BOLR facility is the mechanism by which AMP recruits new practices, practices purchase client-register rights, practices value their businesses to support investment, and practices: “have assurance when exiting the industry”.
AMP says the existing valuation methodology used in its BOLR facility has become “misaligned to ongoing revenue” within practices, due to recent regulatory and industry changes.
Based on actual revenue
The BOLR review is centred on valuing practices on actual ongoing, rather than deemed, revenue, and valuing client registers at a multiple of four times ongoing revenue.
“Ongoing revenue is defined as all revenue that a practice received in the past 12 months that is recurring, including commission revenue and ongoing fee revenue,” the guide says.
“It excludes revenue from non-active accounts, business growth allowance (BGA) and development management and advice (DMA).”
AMP stresses in the guide that the BOLR facility should be a true “last resort, not a default option on exit” for AMPFP practice owners.
Guggenheimer says AMP is “trying to centre [its] BOLR facility around the engagement an adviser and an advice business has” with its clients.
Most of the changes to the BOLR facility will begin on July 1 next year. However, a “glidepath” for ADAs transitioning to MySuper will commence immediately, because that transition is expected to be completed by the end of April next year.
Guggenheimer says there has been “a very substantial consultation process” with the AMPFPA, and the precise impact, and how practices may be assisted, will be assessed on a case-by-case basis.
“That takes time,” he says. “There needs to be some fair and reasonable transition arrangements for those who find themselves in a situation where they feel they have to assess their situation.”
