The transition of power from product manufacturers to financial advisers that started in late 2009 is now complete.
Last week, the US investment firm Oaktree Capital agreed to invest $240 million into AZ NGA, a business set up 10 years ago to invest in high-quality advice firms. AZ NGA holds equity stakes in 50 advice and accounting firms and the Oaktree investment implies a valuation for AZ NGA of around $700 million.
Oaktree Capital’s $240 million investment in AZ NGA is a vote of confidence in the Australian financial advice profession. By extension, it’s also an endorsement of the Delivering Better Financial Outcomes legislative reforms and the potential to deliver cost savings and efficiency gains to advice practices.
AZ NGA’ founder and chief executive Paul Barrett pointed out to Professional Planner last week that Oaktree could have invested in any sector in any country, and it chose to invest in Australian financial advice.
People Professional Planner spoke to about the deal suggested that the valuation multiples placed on Australian advice firms are lower than the multiples placed on advice firms in other countries, notably the US, and that’s partly due to the regulatory burden and associated costs imposed on Australian firms.
The timing of the Oaktree investment is instructive: it comes ahead of the second tranche of DBFO reforms, which are expected to lighten that load and to lift the profitability, and hence valuations, of Australian advice practices.
To put the AZ NGA valuation in perspective, the listed licensee Count has a market capitalisation of $108 million, Centrepoint Alliance $62.2 million, and WT Financial Group $28.9 million.
Critically, however, AZ NGA is not a licensee, and it carries no risk (other than business risk) for the advice its firms’ advisers’ deliver. Nor does AZ NGA carry the cost of delivering services to its adviser firms the same way a licensee does. The practices AZ NGA has invested in pay for services from their respective licensees.
But that’s partly the point. It’s clear from the Oaktree transaction that the real value in the financial advice chain resides in the advice practice – not in the licensee, and certainly not in the product manufacturer – and that on Oaktree’s assessment the outlook for good advice firms is bright.
That’s an important qualifier, though. Advice practices that are well managed, efficient, deliver high-quality services, employ technology cleverly and where there’s a clear plan for what happens after founders and current owners cease involvement will become increasingly valuable. Mediocre or poor practices will continue to languish.
AZ NGA has, by all accounts, done a good job of helping advice principles exploit the potential of their firms. The headline figure of 50 advice and accounting firms masks the volume of activity that’s actually taken place over the past decade. AZ NGA has engaged in more than 100 transactions, which include providing capital to fund acquisitions by the firms it’s invested in. It has facilitated practice mergers to create larger, more efficient businesses.
Its model might serve as a blueprint for other organisation – and there are a few of them out there – seeking to invest in high-quality advice firms. It validates a strategy being adopted by more and more licensees to buy equity in the practices in their own networks.
One hurdle to the licensee strategy, however, could be access to capital.
The shift in power and influence that has led us to where we are today has its roots in a review of financial advice regulation that kicked off in late 2009 when the Parliamentary Joint Committee on Corporations and Financial Services launched an inquiry into financial products and services in Australia – which became know as the Ripoll Review, named for the chair of the PJC at the time, then-Labor MP Bernie Ripoll.
Before the review, power and influence in the advice chain resided squarely with the product manufacturers, simply because they controlled the flow of money. They set and deducted fees from clients’ accounts, and paid commissions to licensees and advisers. But as a direct result of the Ripoll reforms, commissions were banned and clients of advisers were required to pay advisers directly for the services provided.
It put financial advice on the path to professionalism. Advisers, like other professionals, charge for the services they provide. Clients pay advisers directly. And having once enjoyed immense influence, product manufacturers today are sidelined.
It’s taken some time for the changes to flow through the system, and the DBFO reforms are a welcome and necessary move to streamline regulation and to improve access to financial advice.
Oaktree clearly liked what it saw, and what it sees coming.
