FOFA uncertainty erodes practice values

financial-planning/dealer-group/financial-planning-business/financial-planning-firms/financial-advice/FOFA/global-financial-crisis/australian-securities-exchange/government/assistant-treasurer/

28 June 2011
| By Mike Taylor |
image
image
expand image

With last week’s one-year anniversary of Julia Gillard toppling Kevin Rudd as Prime Minister and leader of the Federal Parliamentary Labor Party, the Australian financial planning industry was reminded of just how long it has been forced to endure a state of suspended animation based on the proposed Future of Financial Advice (FOFA) changes.

Australian financial planners have been living with serious uncertainty about the environment in which they are going to have to operate for nearly two years. In such circumstances, it is hardly surprising that financial planning business valuations have been eroded.

Indeed, it is entirely arguable that IOOF’s current offer to fully acquire dealer group DKN would need to have been pitched significantly higher if Federal policy uncertainty had not combined with global economic volatility to place a question mark over what, precisely, a major dealer group is actually worth.

Because it is listed on the Australian Securities Exchange (ASX), DKN provides a ready source of information about the impact of policy uncertainty on a company’s inherent value.

An examination of the DKN share price over the past two years reveals a reasonable recovery from the declines generated by the global financial crisis, followed by another decline almost directly correlated to the Federal Government’s first serious exploration of the FOFA changes last year. The pattern is similar, if not quite so volatile, with Count Financial.

It does not matter that DKN is a dealer group more than ready to handle the likely direction of the FOFA changes. Investors simply do not like too many unknowns.

It follows that if a company such as DKN (which boasts a solid institutional presence on its list of major shareholders) can suffer as a result of policy uncertainty, then the situation is magnified for other, smaller financial planning firms and entities.

Further, planners are not likely to encounter policy certainty any time soon. Even if the Assistant Treasurer, Bill Shorten, were to release the draft legislation in the next few weeks, the Parliament will not be in a position to deal with it until it resumes sitting in Spring.

While policy and legislative certainty is likely to help most firms rebuild their value, there are unquestionably going to be a number of practices which, due to their structures and business models, suffer an irreparable erosion of their worth in the marketplace.

There have been suggestions from senior industry commentators that people who suffer such significant fallout ought to be entitled to some form of Government compensation, in similar fashion to the compensation provided to dairy farmers.

This will not happen. While the notion of Government compensation represents a card worth playing at the negotiating table, the Commonwealth holds enough cards to know it is under no obligation with respect to the loss of commissions-based income. Further, there will not be sufficient public or political outrage to have the Government change its mind. 

Homepage

Read more about:

AUTHOR

Recommended for you

sub-bgsidebar subscription

Never miss the latest news and developments in wealth management industry

MARKET INSIGHTS

So we are now underwriting criminal scams?...

2 months ago

Glad to see the back of you Steve. You made financial more expensive, not more affordable as you claim, and presided ...

2 months ago

Completely agree Peter. The definition of 'significant change is circumstances relevant to the scope of the advice' is s...

4 months ago

A Sydney financial adviser has been permanently banned from providing any financial services, with the regulator deriding his “lack of integrity, trustworthiness and prof...

3 weeks 1 day ago

Minister for Financial Services, Stephen Jones, has provided further information about the second tranche of the Delivering Better Financial Outcomes (DBFO) reforms....

1 week 6 days ago

One licensee has lost 27 advisers in the past week, now sitting at zero, according to the latest Wealth Data figures....

3 weeks 1 day ago

TOP PERFORMING FUNDS