Prioritising practices over licensees, Sequoia’s growth plans will focus on taking on total ownership of advice practices and avoiding the “Pandora’s Box” of the potential liabilities of owning another licensee.
Sequoia CEO Garry Crole says the intention is to buy practices from retiring advisers which will be staffed by employed advisers instead, but they aren’t aggressively pursuing it.
“We’re not likely to buy more licensees though,” Crole tells Professional Planner.
“If we were to grow by acquisition in the licensee area, we’d be looking to buy the rights to the advisers rather than buy other licensees.”
Crole says the liability of acquiring another licensee is too risky for the business and not justified by the return on investment.
“We’re not open to opening up Pandora’s Box and not being able to see what you don’t know, that’s the issue,” Crole says.
Practices acquired by Sequoia are 100 per cent owned by the group with the advisers becoming employees, rather than going part-equity stake route of other licensees like Count and Diverger.
“The challenge we’ve got is there isn’t enough advisers looking to become employees,” Crole says. “If you take on too many books, you can’t service the clients with the current shortage of advisers.”
Crole says the group has 20 provisional advisers doing their professional year.
“We’re making an effort to introduce new advisers into the industry but it’s a big challenge,” he says. “[It’s] hard to find people that just want to be an employee rather than own their own practice.”
Citing potential liabilities as the reason not to pursue scale by acquiring other licensees, Sequoia has closed Libertas Financial Planning with advisers given the option to join InterPrac or Sequoia Wealth Management, find another licensee or go self-licensed.
“We gave advice to the Libertas advisers four or five months ago that we’re going to stop providing services to the group,” Crole says.
Crole underlined the fact that the Libertas advisers were never transferred to the other Sequoia-owned licensees, and it was up to individual choice to stay in the Sequoia network.
“We basically gave them notice that we no longer provide services and then when we had no advisers in there, we went through the process of liquidating that business,” Crole says.
“But maybe 85 per cent elected to stay with one of the Sequoia-owned licensees and some others went and got their own licence or joined another licence.”
Posting its full year results to the ASX last Thursday, the company reported operating profit of $5.5 million, but a net loss of $2.3 million after tax, due to the writing down of assets like Libertas, as well as acquisition deals that ended up being more expensive than forecast.
“We acquired a business called Tag Insurance Brokers that we ended paying a lot more for than we anticipated in the accounts because their business outperformed,” Crole says.
“The other thing was the tax liability on the business. The operating profit was $5.5 million and if you added back the abnormal [item] it was closer to $9 million.”
Revenue declined from $147.3 million in FY22 to $131.5 million in FY23, but the company expects FY24 revenue to outstrip FY22.
Additionally, it is targeting a 15 per cent profit margin for its four service areas (direct investments, equity markets, licensee services and professional services).
The licensee services business grew from $64.8 million in FY22 to $77.9 million in FY23, but earnings before interest, taxes, depreciation and amortisation (EBITDA) dropped from $5.5 million to $3.9 million.
Crole says the EBITDA decline was due to the aforementioned of writing off Libertas to zero, the increased cost of operations, and a PI insurer dispute.
“We increased the compliance teams and our practice management team,” Crole says.
“We invested for the future and took on more expense this year. We had a few abnormal claims in that division that impacted the results that we were still looking to recover from our PI insurer, but we didn’t recover them in this period.”
Overall, Crole says the company is optimistic about the economic environment, but the main concern is a lack of advisers.
“We’re happy with the government and [Minister for Financial Services] Stephen Jones,” Crole says. “It’s making a difference to the industry and we’re positive about that.”