A race for product distribution has underpinned practice valuations ahead of the introduction of fee-for-service payment models, staving off an expected drop on the back of uncertainty ahead of regulatory changes to the way planners are paid, industry participants have said.
However, uncertainty in the face of an upcoming ban on advice-related changes and other reforms included in the government’s Future of Financial Advice (FOFA) package could dent prices fetched by principals looking to exit their businesses, some said.
“It’s still a seller’s market,” Kenyon Partners managing director Alan Kenyon said.
“Everyone wants distribution,” he said.
Kenyon, a veteran broker of practice sales and acquisitions, said valuations had come off marginally from an average 3.5 times recurring revenue before the global financial crisis (GFC) to about 3.3 times, but the recurring revenue base was often lower than before the crisis.
Paragem Dealer Services managing director Ian Knox agreed distribution was key, particularly for big banks and other financial services organisations.
“The sad truth in the acquisition debate is financial institutions do not buy planning businesses for the quality of advice they give,” Knox said.
“They buy planning businesses for their ability to promote their products because the annuity stream resides in the product. If you make enough product annuity, you can afford to buy distribution.”
However, the head of a financial planning training and coaching business said old-school advisers were finding it difficult to corporatise their businesses and if the difficulty became widespread, valuations would fall.
“They’re very good at building rapport, but they haven’t mastered the ability to build a value proposition that isn’t associated with them,” Strategic Consulting and Training manager director Jim Stackpool said.
“That’s why four or five years ago, these businesses were selling at multiples of four and now they’re selling at multiples of three and soon they’ll be selling at multiples of two.”
Knox said a fee-for-service or other time-based payment model did not bode well for planning practice valuations.
He said the model was too similar to billing methods used by accountants, whose practices were valued on a multiple of one, below the financial planning industry’s valuation of three times recurring revenue for a practice with a willing seller and a willing buyer.
“Clearly adopting an equivalent accounting pricing mechanism would lead to the devaluation of practices, so it’s understandable that the industry will need time to adapt,” he said.
However, Kenyon said the comparison was akin to comparing apples with pears and rejected the idea fee-for-service would weigh on valuations.
“It will pressure valuations for businesses that put their head in the sand – but that might be 30 per cent of the industry, not 70 per cent as has been purported,” he said.
