Driving business practice growth and profitability, and the entrepreneurial spirit, can co-exist with the fiduciary duty and placing the client at the fore, the Professional Planner Licensee Summit has heard.
AZ NGA chief executive Paul Barrett said practices can be entrepreneurial and build “awesome profit centers” while still doing the best thing for clients.
“You can be a fiduciary and an entrepreneur; it’s okay guys, chill out, you can do both,” Barrett said.
He referred to what AMP, BlackRock and Lonsec have done with their managed account collaboration as “trying to push the envelope” to do things differently.
“It’s trying to push the envelope further and do things different,” Barrett said.
“People can call it vertical integration all they like. If it is, it’s the new version of vertical integration.
“Conflicted remuneration is dead. Shelf space fees, rebates and commissions are dead. The great thing that held us back as an industry is gone.”
Barrett said the systems in place that protect repeats of the sins of the past make this an exciting time for innovation in the market.
“When people like Matt Lawler and co start building these new systems they’re doing it in a completely different environment,” Barrett said.
“You’re here to make money and why shouldn’t you be able to make money? That’s the point. Entrepreneurship and being a fiduciary can co-exist and we need to kind of relax about it.”
Growth mindset
Along with AZ NGA, Merchant is a keen player in the equity stake race in the advice profession, with the US-backed firm entering the Australian market last year.
Merchant Australia partner David Haintz said he’s looking to invest in the “20 per cent of the 20 per cent” of businesses that are growth firms.
“Investors are looking at wealth firms [because] they’re highly profitable, the high dividend payout ratios, high regulation, low cost to entry, high barriers to entry, stock market and strong tailwinds for superannuation,” Haintz said.
“You’ve got advisers out there that are practitioners, they might be good managers, but not everyone is good at running a growth firm, and they’re the firms we’re looking to partner with.”
Haintz said the firms Merchant has invested in collectively generate $65 million of revenue and about $26 million of EBIT, and it is in the process of closing out a $600 million capital raise.
“We’re committed to the medium/long term globally,” he said.
“Merchant is primarily a US company with 100 partnerships around the world, but we’ve only been in Australia a short time.”
Barrett said “at last count” AZ NGA has completed 149 transactions and the organisation’s revenue will be roughly $250 million with $65 million of profit.
“We have 40 hubs around Australia, those hubs are consolidation, we’ve got the super firm strategy you may have read about,” Barrett said.
“Essentially we’re building $50 million revenue firms in the suburbs because we want to shift the power back to advice. We want these advice firms to be strong, with big balance sheets, access to capital, tech and know-how, which has been the domain of the product providers for the last 30 years. We want to shift that to the advice businesses.”
Barrett said when AZ NGA started investing in advice firms it was promoted as a succession planning solution.
“That was our pitch,” he said.
However, within six months they realised it was “boring” and were missing an opportunity by lacking a mindset around growth.
“We’ve adopted this growth mindset big time, we grew by 50 per cent last year and we’re going to try and grow by the same this year,” Barrett said.
“We’re encouraging our firms to grow – not at all costs, but to grow sensibly. It’s good for everybody, by the way. Yes, it’s good for shareholders, and managers and owners, but it’s also really good for clients.”
Haintz said advice firms should be aiming for 15 per cent annual revenue growth, but most only achieve less than 3 per cent.
“Your typical advice firm is making EBIT [earnings before interest and taxes] margins anywhere between 20 to 40 per cent. That’s interesting,” Haintz said.
“What’s really interesting is growth. There’s 6 to 8 per cent run off on the first of January every year with pension payouts, lost clients, people taking money out for holidays so that growth needs to [be] 6 to 8 per cent to break even.
“When you do the numbers and your typical advice firm is only growing 2 to 3 per cent – sure there’s plenty doing better than that – but you want to set your target to a 15 per cent growth target.”
Franklin Templeton EMEA/APAC head of industry advisor services Robert Crossley financial services business in general need to have a well-defined mindset about why they’re pursuing M&A.
“Be clear about where you add value and what your competitive advantage is, and what skills you lack for the next stage of growth and the focus on what that value is,” Crossley said.
“If cost reduction is in your top three reasons for doing [M&A], it probably isn’t going to end well. The focus has to be on the additional value you can create.”
Keeping the licensee in play
While some licensees offer M&A services, often by investing directly themselves, Avanzare Group managing director Jaime Johns noted not all licensees have the same philosophy and resources for M&A.
“There’s different services that different licensees provide and some of those services don’t get into the nitty gritty and handhold someone through a transaction,” Johns said.
“Therefore, that firm has to go and seek professional service to facilitate that. Then you’ll get other full-suite licensees who will have the skills and the talent pool within their business to help that practice owner navigate it.”
Johns said licensees must stay close to what their firms are doing to maintain good oversight over the transactions, even if capital isn’t directly being involved.
“The challenge is if those licensees don’t get close to the transactions that are happening with the firms in their group, they will wear significant risk if that book has not had good due diligence to ensure that they’ve put in the right risk parameters to bring that book into their group,” Johns said.
