The method of valuing financial planning practices is undergoing noticeable change with a move to an earnings-based approach as opposed to a revenue-based system, according to Hunts’ Group principal Anthony Hunt.
Traditional practice valuation techniques have used calculations based on a set multiple of the firm’s revenue.
Hunt said moving to an earnings-based approach brought the valuation of financial advisory practices into line with most other business valuation techniques and had flow-on benefits to the firm itself and the clients it serviced.
“Valuing businesses on an earnings basis throws up a whole range of other issues around what becomes important in a financial planning practice,” he said.
“One of the things we particularly like about this system is that it is one set up to adopt a more corporatised model, so it’s got inbuilt efficiencies and understands the importance of making business processes efficient so the client gets a great outcome and the business itself also gets a great outcome from that.”
He said the move was a reflection of the multiple changes the financial services industry was currently facing and forced planning practices to revisit elements of the business, such as terms of trade and in particular the pricing deal in place with the incumbent platform provider.
According to Hunts’ Group senior consultant Wayne Wilson, the move had been driven by several factors, one being the global financial crisis that wiped away a significant portion of many advisers’ fee base.
Another reason is the potential impact of the Future of Financial Advice reforms. This is because traditionally the valuation multiples were calculated using the assumption an average client would generate a seven-year revenue stream. However, Wilson said the opt-in requirement meant that assumption could no longer be relied upon.
The final factor was the move by the larger institutions to increase their distribution channels, with efficiently-run planning practices being a sought after element in that process, he said.
