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Advice Business Values in Decline

Radar Results says advice business valuations are heading south during a period where the gap between the value of ‘quality’ and ‘conventional’ advice businesses is growing…

…since 2007 it’s been a sellers’ market

The firm, which specialises in facilitating the buying and selling of financial services advice businesses, says that over the past ten years financial planners have been able to sell their practices for a recurring revenue multiple of between 3.0x to 3.2x. The broker also noted that if the practice was considered ‘less than high quality’, they would still have received a price multiple of between 2.5x to 2.7x recurring revenue: “This was because since 2007 it’s been a sellers’ market,” says the firm.

The Radar Results statement released this week, however, notes that higher-quality advice businesses are now selling for between 1.5x and 2x recurring revenue, while conventional advice businesses are selling for between 0.5x and 1x recurring revenue multiples: “Therefore, the difference today between the valuation of a high-quality financial planning practice compared to a conventional one is possibly up to 1.5x the RR.” The broker noted that prior to 2018 this valuation differential would have been around 0.5 times the recurring revenue.

…now it’s a buyer’s market

The broker outlined a series of factors that has led it to declare that times have changed “…and now it’s a buyer’s market.” These factors include:

  • Finance is now harder to obtain
  • The Banking Royal Commission has forced multiples down for conventional practices
  • There are many more advice businesses for sale, and in a related point:
  • Higher educational requirements are forcing planners to retire earlier and consequently, sell their practice

According to Radar Results, buyers now have a larger selection of sellers from which to choose and can therefore negotiate lower price multiples and obtain better payment terms.

It has also outlined the characteristics it attributes to what it refers to as ‘quality’ and ‘conventional’ financial planning practices:

‘Quality’ Financial Planning Practices

  • All clients would have an annual fee level of between $3,000 to $8,000
  • Each adviser would manage approximately 100 clients located in a capital city
  • Opt-in is confirmed at the annual reviews
  • The age of the clients is probably 40-65 years and cross-selling opportunities therefore exist.

‘Conventional’ Financial Planning Practices

  • Would have many clients compared to the number of advisers, possibly 1 adviser and 1,000 clients with 300 clients considered active
  • Geographically, the clients would be spread across a large area
  • Minimal reviews are conducted and the review program may be sporadic
  • Compliance is probably not 100%
  • There may be missing Financial Disclosure Statements and Opt-In documents
  • Clients would have small account balances and low annual fees of between $500 and $1,000, or even less.
  • The practice may also have a good percentage of grandfathered clients, possibly up to 20% of the client base and that many of the grandfathered clients are probably not engaged and cannot be contacted

  • PS

    What am I missing here? When [unfortunately not ‘if’] Labor gets in on Saturday they will inevitably do what they did with Mortgage brokers. AND, as with mortgage brokers they are not going to ban ‘existing’ renewal [trail] commissions. As a 60+ y.o. adviser, I will wait another 12 odd months [prior to mandatory FASEA exam] until the dust has settled – and the panic selling of client books has subsided – and then look to sell my client book. Even if it’s still somehow only worth 2x recurring, I will have earned 1 more year’s income + 2 year’s recurring = 3x recurring income. I planned to sell at age 65 anyway for 3x. The best of both worlds!

    • Dan

      Liberals said they would ban commissions as well so not sure what your on about.

      • ken

        I think he means we are a better chance of retaining commissions with a returned coalition government. But from what I am hearing in the market place ending commissions will end the risk insurance retail market full stop! for all the reasons we have been trying to tell the “powers that be” for years now. You simply cannot run a risk business on fee for service and I also believe that it can not be done either without a minimum 80% commission structure and a 1 year responsibility period. Unless you work from home and have no overheads and can find the time to re qualify yourself. Pretty much every adviser 60 or over will retire on the 31st December 2023 unless change is instigated along these lines. Companies will not be able to support the claims they have on there books now let alone new ones as the main introducer { the adviser } will be non- existent or in depleted numbers up to the necks in education and compliance too scarce to assist in the problem.
        Risk cover in Industry Super will boom and not be cheap along with decent unbiased advice disappearing.
        Is this what they { The banks and insurance companies} wanted all along or is this fallout from a badly conceived idea ? What’s that industry slogan “Its not to late “

        • Ten Beers

          Agree. The powers that be and hayne will go down in history as the most damaging to industry and the public. Ive decided to exit after 30 years and lets leave it all to the less experienced and those who can get their head around the new compliance and lets hope they find a better solution to unexpected loadings etc. But its time to return my life back to family focus and enjoy.

      • PS

        ASIC will conduct its review in 2021 of the LIF regime. In very basic terms, Labor is more likely to ban commissions irrespective of ASIC review outcome. Coalition sticking to original LIF intent and not Hayne report outcome.