A change to the buyer of last resort (BOLR) arrangements that some institutional dealer groups offer their member firms could have more influence on the value of financial planning practices than pending regulatory changes, brokers have said.
Industry consultant and business broking firm Centurion Market Makers said that while many believed the value of advice firms would fall as a result of industry reforms, changing the policies guaranteed by licensees in their buyback provision agreements could have even more influence.
“While revenues could be impacted if commissions and rebates were banned, and the opt-in proposal introduced, my view is that the key determinant of the pricing of practices has and will remain for the foreseeable future the price guaranteed in buyback provisions,” Centurion director Chris Wrightson said.
Wrightson said most buyback and BOLR provisions agreed to acquire the income rights of a practice for a present value of three times the firm’s annual recurrent revenue.
“It is this formula and the terms attached that shape many open market transactions in the industry, as advisers who wish to buy or sell are using it as a benchmark for value,” he said.
He estimated that about 40 per cent to 50 per cent of financial planning practices still had those business buyback terms in their licensee agreements and others used them as an industry standard.
Kenyon Prendeville director Alan Kenyon said in his experience not all dealer groups offered the same multiple of annual recurrent revenue as part of their buyback provisions, however, he acknowledged those arrangements did influence some purchases that took place in the market.
“Dealer groups don’t tend to aspire to buy financial planning firms, so I think a lot of them that have these arrangements have reviewed them, so they do what they were intended to do, which is offer a base price in the event a principal cannot sell their business due to premature death or permanent disablement,” Kenyon said.
