The current referral system between advisers and accountants heavily favours the adviser, Omniwealth chief commercial officer Matt Kidd says, and accountants are often oblivious to the real value of their referrals.
Kidd says the issue is that financial planning firms are increasingly multi-disciplined and have multiple avenues to make money, while accountants have only one.
“If you look at Omniwealth, we’ve got legal, advice, mortgage broking, SMSF, and the list goes on. One client coming into this business could be worth $30,000, while it could be worth only $2000 to an accountant,” Kidd says.
The referral disparity is exacerbated when it comes to selling, as advice firms are generally sold at higher multiples.
“Accounting fees are valued at roughly a 1 X multiple, while financial planning fees are valued at a 3 X multiple,” Kidd explains.
He provides the example of an average advice referral worth $5000 a year in recurring income to an advice firm.
“That’s worth $15,000 to the business when it’s sold, whereas if you’re only doing a tax return and charging $500 each for a couple, that’s worth $1000,” he says. “If the business is sold, that’s only a 1 X multiple, so it’s worth $1000. So there’s a $14,000 disparity in what each has added to the other’s business.
Kidd recalls explaining the inequality of referrals to an accountant, who “nearly fell off his chair”.
“He’s a smart guy, but he’d never really thought about it like that,” Kidd explains. “He had no idea how much business he was creating for those advice firms.”
Kidd notes that standard accounting practice valuations are set to drop even further due to increased outsourcing and requirements the regulator handed down recently that restrict unlicensed accountants from providing financial advice.
Joint-venture solution
Omniwealth has found a way for to redress the imbalance in referral value that would benefit both the advice and accounting sides, Kidd says.
He suggests forming separate joint-ventures between referrers, with an even split on proprietary ownership. Discretionary payments could be negotiated within each referral or formal structures could be adopted, and joint accounts would be employed for full transparency. The new company would take the accounting firm’s name and become a corporate authorised representative of the licensee – in this case, Omniwealth Services.
Kidd states that the model depends on the advice firm being willing to sacrifice its side of the profit on the advice component – as much as 30 per cent of total advice revenue – in exchange for a higher business valuation on an eventual sale, and access to profit on ancillary business services such as estate planning, insurance and mortgage broking.
“It’s quite simple. If we make 100 cents in the dollar, we give up a percentage of that, call it 25, 30 per cent, and give it back to the firm,” Kidd explains. “All the margin’s gone. Our 70 or 75 per cent covers wages and overheads for providing the advice, but we’ve given the rest away because we want a good relationship and we’re prepared to give up our profit now for a future sale of the business.”
Making profit on services other than advice alleviates the sacrifice, Kidd explains, and the accounting firm wins out on the income, but it is the business value implications that make it worthwhile.
“If together we get up to $500,000 a year of recurring income, that’s a $1.5 million business that we could sell for $750,000 each,” Kidd explains. “We give up our profit margin along the way to make it back on the sale or merger of that business.”
Kidd admits that losing out on advice margins can handicap business earnings, but if the sacrifice is restricted to the advice component, the damage is mitigated.
“From a financial planning point of view, we’re giving up a big chunk, but we’re multidisciplined, we don’t give up 30 per cent of everything – you’d go broke! You give up only 5 per cent if you’re doing an estate plan or setting up a mortgage,” he explains.
Kidd says successful joint-venture arrangements for advice firms aren’t restricted to accounting counterparts.
“We’ve got four JVs at the moment, with two in the pipeline,” he says. “There are two with good-sized accounting firms, one with a mortgage broking business, and one’s just been signed off with a business coaching firm.”
