The Trowbridge Report recommendations, if implemented, could have a negative impact on the value of risk-only advice businesses, one business broker has warned.
Centurion Market Makers Founder, Chris Wrightson, said while the exact impact of the reforms is unknown, advisers’ earnings were likely to fall. He explained that, as with any business in any industry, if the forecast for earnings falls then the value of the shares or business tends to follow.
The effect of the fall in earnings is likely to be further compounded by the fact risk businesses have been attracting a premium since the GFC, said Mr Wrightson.
“After the GFC, the demand for risk specialist practices grew, as business owners looked to diversify. In addition, the cashflow derived from upfront commissions is attractive because it can be used to subsidise the remainder of the advice delivered. These factors combined to add a premium to risk practice values, placing them around 10-15% higher than financial planning businesses,” he said.
Mr Wrightson believes that removing the ‘cashflow incentive’ that is provided by commissions will make risk advice less attractive for some businesses. Particularly because of the amount of work that goes into placing risk business.
“I think people underestimate how much work goes into getting a client underwritten these days,” Mr Wrightson explained. “Everyone is talking about the sale. But there’s not enough conversation, particularly in the political space, about the amount of work an adviser goes through to get the client underwritten, so that the contract is put in place. In the current debate, that work is being referred to as ‘the sale’, but it’s actually a separate piece of work that takes place after the sale, and I think referring to it in that way is undermining the work that really goes on.
I think people underestimate how much work goes into getting a client underwritten these days
“The removal of commission will change how much risk advice is offered in the market place. Australia is generally underinsured, and this move could lead to an even greater problem. The economic impact of that is borne by all of us.”
With risk advice less attractive, the premium previously paid for risk books is likely to disappear, said Mr Wrightson.
“This premium has been constant while the overall value of practices has fallen over the last five years. It is highly likely that this premium will reduce or most likely not exist at all if the remuneration recommendations in the Trowbridge report are implemented.”
Mr Wrightson did note that it is early days, and the market is unlikely to see any real change in values in the immediate future.
“Until the reforms are regulated, we won’t see that fall in value. History shows us that businesses are unlikely to implement changes until the eleventh hour, when something is actually regulated. A For example, even though we knew what FoFA would look like 18 months before, there was an expectation that things could still change. And as it happened, some of it was repealed, so the adviser community is a little apprehensive to make significant changes to their business models, until it’s set down in regulation.”
Good point re underwriting Chris – it can be months of emails, phone calls & worry before an applicant becomes a policy holder – or doesn’t! Which is another aspect of our business hardly mentioned.
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