In light of pending regulatory changes, more principals have or are preparing to sell their less profitable client books as they remodel their businesses for the future, broker firms have reported.
Kenyon Prendeville director Alan Kenyon said more advisers were selling their C and D-class client books as they comprised clients that did not generate significant revenue for the business.
“The sale of C and D-class clients has tripled in comparison to this time last year, which I suspect has been caused by proposed legislative changes and people wanting to ensure the value of their business does not diminish should these changes come into play,” Kenyon said.
Advisers were selling their less profitable books so they could focus on the top 20 per cent of their client base, which generated the most revenue, he said.
“Because a lot of advisers are re-evaluating their business around the potential that commissions will be banned come 2012, many are repositioning themselves and the type of clients they deal with so that they can deliver a broader value proposition to their better-end clients,” he said.
“A lot of principals considering retirement are also selling their C and D clients as a way to repay debt before their exit date.”
He said less profitable client books were nonetheless a good low-cost way to enter the market whether you were a junior adviser wanting experience, a salaried adviser looking to enter the independent market, or an adviser wanting to enhance their book with a view to entering an equity arrangement.
Radar Results principal John Birt said he too had noticed an increase in the number of C and D-class clients for sale in the past few months, particularly since Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced the Future of Financial Advice reforms.
“A number of vendors expect the price of C and D-class clients to fall over the next two years, so many want to sell today and get a good or reasonable price rather than wait,” Birt said.
“Advisers are also seeing value in scaling back the number of clients they have to retain their more profitable clients and to in turn reduce the potential for compliance issues.
“Similarly, if proposed legislation takes effect, advisers will have to confirm each year that clients want to remain clients, which will be quite an onerous task the bigger the client base you have.”
He said while C and D clients did not generate the profits A and B clients did, they could be bought at a reasonable price and provide additional revenue as well as cross-selling opportunities.
Centurion Market Makers director Wayne Marsh said while he had not noticed a spike in the sale of C and D-class clients, there had certainly been an increase in inquiries about them.
“With commissions likely to be banned, a lot of businesses are considering selling a portion of their client base as they start to reconfigure their businesses so they can offer a quality fee-based proposition to their more profitable clients,” Marsh said.
