Market for lower tier financial advice clients heats up

The market for C and D financial advice clients is heating up, both for sellers and buyers, writes Caroline Munro.

Financial and regulatory pressures on advisers over the last couple of years are resulting in fundamental changes to their business models, with the market for client books particularly experiencing a surge.

However, there are differing opinions as to whether these books will retain their value.

Kenyon Prendeville claims book sales have increased by 80 per cent over the last financial year and consultancy firm Radar Results also reports an increase in supply as well as demand.

Radar Results’ John Birt says one of his major Sydney clients, for example, is looking to buy 50 client books in the next six to 12 months, stating that there is huge demand.

This demand is partly coming from larger institutions, which see C and D client books as an effective strategy for growth.

“We’ve normally represented the more boutique advisers in the past who want to add those books to their bottom line. That’s still going on, but more recently there’ve been a couple of our large institutional clients that have said to us that they want a lot of Cs and Ds,” Birt says.

He says Radar Results currently has three books of 5,000 clients that the institutions are considering with the intention of breaking them up into smaller parcels and offering them at a discount to advisers as an incentive to join.

“It is a good growth strategy, so institutions are doing that more and more now,” Birt says.

He says the books are generally going for between two and 2.5 times recurring revenue, although a good quality business might be able to sell its book for three times.

However, he is more moderate about his views on the current market, stating that “it hasn’t gone silly”.

Kenyon Prendeville co-founder Alan Kenyon, however, says the firm has experienced a dramatic increase in book sale activity, which is not only a result of financial constraints on businesses that will need to improve on efficiencies, but also a result of fundamental changes to business models in response to reform and disenchantment with dealer groups, fund managers and researchers.

Kenyon says there has been significant rethinking of business models as the global financial crisis led advisers to question researchers, dealer groups and fund managers along with the high cost of platforms.

“All of those things come into question because at the end of the day the adviser is the only person that the client holds responsible, rightly or wrongly,” Kenyon says, adding that all facets are examined when revenues are under pressure.

Despite uncertainty about what form the industry reforms will ultimately take, Kenyon says many businesses are proactively changing their business models and shedding their C and D clients. He expects this trend to continue for some time.

Birt says practice owners have always sold off C and D clients to improve efficiency and to enable them to only spend time, effort and money on their top revenue-generating clients. However, he concedes that activity and urgency has increased recently in the lead up to the reforms.

“They’re doing it anyway, whether there are reforms or no reforms,” Birt says. “But the banning of commissions or trails, or should I say the replacement of a trail with a fee-for-service arrangement, is making it difficult to service Cs and Ds.”

He adds that more advisers are looking to get rid of their lower tier clients because of uncertainty over whether these books will retain their value.

“You want to sell your Cs and Ds for what you can get for them today,” he says. “You used to be able to get 2.5 or 2.8 times [recurring revenue] a few years ago. That’s slipping down now and we’ve got some advisers who are getting quite desperate to get rid of them before the reforms come in.”

Birt believes values are coming down because eventually the trail commissions will disappear. He concedes that grandfathering provisions may mean they retain their value, but he says no one can be sure.

“I think it’s the uncertainty of what’s going to happen,” he says. “Many advisers still believe that these reforms are a threat to their [existing] trails. I think they are and trails will disappear completely.”

Kenyon concedes that there has been some questioning about whether legacy business will retain its value, but he is of the view that grandfathering provisions in the reform package, such as the opt in for continuing advice reform, could make books of business more valuable. Nonetheless, he says, buyers are being more discerning.

“The value ascribed to these businesses will depend very much on the quality of the information that a vendor provides, and the segmentation on both the clients and products,” he says.