Financial planning practices looking to grow through acquisition are being more skeptical than ever about the number of clients that advisers have capacity to service, one expert says.

“Everyone wants engaged clients,” says Greg Quinn, executive director at specialist M&A advisory, Chase Corp.

Advice practices with large per-adviser client registers are being put under the microscope by buyers and are potentially being discounted in the open market, says Quinn, who is working with at least eight financial planning practices looking to buy or sell.

“If one adviser tells you he has a book of 1,000 clients, you just know most of his client base is not engaged,” Quinn says. He adds that advisers with 200 clients or more are “pretty tapped out” when it comes to properly servicing those clients, a situation buyers are acutely aware of in the current environment.

The revelations during the early stages of the Royal Commission into Misconduct in the Banking, Superannuation and Finance Industry, in March, threw into light the practice of fees-for-no-advice, an area that’s widely expected to be included in the commission’s interim report findings and subsequently regulated against.

“Businesses with unengaged clients and trailing commissions won’t fare well in a post-royal commission world,” Quinn tells Professional Planner. Quinn says he’s telling potential vendors of advice businesses either to look to sell within the next six to 12 months – before legislators have a chance to act on the commission’s final recommendations – or put a growth plan in place to stay in business for at least another four to five years.

“There will be no good news to come out of the royal commission for the valuation of advice businesses in the medium term,” he predicts.

“For those practices that have significant numbers of unengaged clients (30 per cent-plus) there will be no good news coming out of the RC from a valuation perspective. Alternatively form those high quality firms with well engaged clients, paying good ongoing fees, the future is bright as there is still strong demand from acquirers,” he says.

A ban on conflicted remuneration will be among the measures on the table for the Hayne royal commission and legislators in coming months. While some industry representative bodies and businesses, including the likes of AMP and the Association of Financial Advisers have railed against such a ban, most have acknowledged that, at minimum, a phase-out of conflicted remuneration is called for. Institutions including Westpac-owned BT, Macquarie and National Australia Bank have moved to cut off commissions within their respective salaried networks.

“The best-case scenario is there’s a phase out period [for conflicted remuneration],” Quinn says. “Buyers in the market don’t want to be left with older legacy businesses with fees-for-no-advice.”

Even so, there is high demand for sellers with quality client bases.

Quality client bases – those with highly engaged clients – are fetching about 3 – 3.5 times recurring revenues or 6-7 times normalised earnings before interest, taxes, depreciation and amortisation, Quinn reckons.

Businesses in $3 million to $15 million capital value range are in highest demand, he says.

While the market for transactions is lively – Quinn says he’s worked on “twice as many” transactions this year as he’s averaged in the past, the problem large institutionally owned Licensees are facing is that the larger advice practices are looking at leaving to get their own Australian Financial Services License or they are joining a boutique AFSL; smaller firms often don’t have the same scale advantages to explore all available options, he notes.

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Smith is the editor of Professional Planner’s print and digital platforms. He is an experienced financial journalist, editor and multimedia producer who has held senior editorial positions both in mainstream press and trade media.