A likely ban on conflicted remuneration has hit advice practice values in the range of 15 per cent, experts have said.
According to Steve Prendeville, a managing director at advisory firm Forte Asset Solutions, this reduction has its basis in the likely end of grandfathered commissions.
“The only devaluation that I am personally putting on our income stream is what’s deemed to be conflicted or grandfathered revenue,” Prendeville said. “Obviously that’s a risk with the Royal Commission recommendations to be handed down in February.”
Grandfathered commissions normally make up 20 per cent of advice firms’ revenue, Prendeville explained. When valuing advice firms according to multiples, it is this portion that he believes should be discounted.
“At the moment I’m valuing that part of the revenue stream at two times [annual revenue],” he said, “while the rest of the revenue may be at three times.”
Paul Tynan, chief executive at Connect Financial Service Brokers, said the last 12 months has marked the first significant reduction in prices of financial planning businesses for about the past 20 years.
“A year ago you’d get about 2.8 to 3 times yearly revenue for good holistic financial planning businesses under $1 million,” Tynan said. “Now that type of business is down to a 2.5 or 2.6 multiple.”
Meanwhile, Tim Lane, consultant at Centurion Market Makers, agreed with the general assessment that multiples have experienced a slight drop from three down to “around 2.6 and 2.8”.
Like Prendeville, Lane attributed the valuation reduction primarily to a likely banning on grandfathered commissions. Lane said that firms should be very aware of how dependant they are on these for revenue.
“Where you’ve got a lot of grandfathering or grandfathered rebates you’re going [to be under market value in] this market compared to what we’ve seen,” Lane said. “Logically there is more risk.”
FASEA not a factor
However, despite the hit practice valuations could take on the back of a commission ban, Prendeville remained relatively sanguine about the projected fallout from tougher education guidelines under the Financial Adviser Standards and Ethics Authority (FASEA).
Prendeville pointed to data from Adviser Ratings, which reported that 14,724 advisers have already left the industry in the last five years.
“In that five year span I haven’t seen any devaluation of practices,” Prendeville pointed out. “In fact, in the industry we’ve had excessive demand and very little supply. In capital cities I would have at least 50 enquiries for every asset that I’m representing, it’s absolutely a seller’s market.”
Prendeville’s firm acts on behalf of buyers and sellers in the financial planning, risk and accounting businesses. He says that the end of grandfathered commissions – flagged in this recent feature in Professional Planner – is a fait accompli, and “likely to be adopted without any sort of argument, given that we’re in an election year.”
Despite the downward pressure a commission ban will have on advice practice valuations, Prendeville said he is positive about the market for advice firms.
“While we’ve got cheap finance we’ve still got quite a bit of equity in our markets as well,” Prendeville said, before pointing to high profile purchases such as Sequoia Capital’s acquisition of Interprac, Easton Investments acquisition of GPS Wealth and AZ NGA’s purchase of 36 boutique firms “in about as many months”.
Prendeville admitted that the market is “in the eye of the storm” and waiting for the royal commission to take effect, but says it’s only temporary.
“As soon as we know what the recommendations are, I believe that the market will once again come back,” he said.
A matter of perception
While other advice brokers have comparable assessments on the movement of advice practice valuations over the last 12 months – a roughly 15 per cent reduction – not all are as confident that the reduction is temporary.
Connect’s Tynan said that while prices have been “very, very stable for many years,” the royal commission, impending education standards and a tightening of lending restrictions by the banks to advice firms have all depressed the market.
According to Tynan, this trend will continue.
“Multiples are going down,” Tynan said.
Lane also noted that firms looking to sell in regional areas are finding it tough, while city firms are doing better at holding their value.
“It depends where your practice is,” he says. “I’ve seen some appreciable difference in demand for practices which are regional versus capital-city based.”
*This article was edited 30/10/2018 at 12:49pm