Consolidators slide from view.

After bursting onto the financial planning scene with such gusto and promise, the consolidators are themselves consolidating after a horrible year. Following poor performances, they are among the biggest underperformers in Australia’s share market.

For the year to end June, Stockford lost $5.7 million including amortisation, blaming the shortfall in earnings forecasts on unexpectedly slow progress in centralising infrastructure, IT and management. Set-up costs had largely negated cost savings. Excluding amortisation, the group made a $4.1 million profit ($7.5 million was projected).

Even worse hit was Harts. In the year to end June, it lost $92.7 million after it was forced to write down $63 million in goodwill and $10.5 million in bad debts, leaving a $17.5 million operating loss.

And its woes are not over with, with recent news that a liquidator had been appointed to the group by the Australian Securities and Investments Commission (ASIC).

Deakin Financial Services reported a total net loss of $10.8 million in the year to end June, which it attributes to its restructure from a securities trader to an integrated financial services provider, and the difficulties associated with the change.

The only major consolidator group to perform in the black was Investor Group, whose earnings before interest, tax, amortisation and outside equity interests grew to $10.4 million from $5.7 million the year before.

Shareholders have lost heavily as the various groups’ share prices have collapsed. Stockford peaked at $2.10 in January and in mid September traded at $0.34. Harts plunged to $0.04 after reaching $1.40 in October 2000. Deakin has a similar tale of woe - hitting $0.12 from $0.40 in December.

Investor Group was again the least affected, at $2.40 in mid-September, its share price was not even halved after reaching near $4.00 in March.

In their day, these consolidators forced dealer groups to at least consider offering advisers equity in the dealer group or its master trust.

Only last November, the industry’s fifth biggest dealer group, Professional Investment Services (PIS), set up its own consolidator, Professional Accountants Limited.

Are the sceptics, who pointed to what they see as structural problems within the whole consolidator concept, being vindicated?

Tom Collins, Top 100 researcher and principal of The Tom Collins Consultancy, reckons consolidators “are headed out the back door. Their model is inherently and fatally flawed”.

Consider the key vulnerabilities. Consolidators usually pay for at least part of the practice by offering equity in the consolidator group. On top of attempting to capture economies of scale benefits, consolidators offer an attractive exit strategy for advisers and accountants.

This leads to the first criticism levelled at consolidator structures, namely, once the consolidator buys the business, the previous owners have less motivation to further the interests of the consolidator as they had with their own business.

Then, many practices bought by the consolidators are accounting practices whose primary value is often their potential as financial planning businesses. The cultural gap between financial planners and accountants makes it risky to assume that the new group will leverage the accounting relationship with clients whose additional demand for financial advice is not being met. It is moot whether accountants and financial planners are natural partners responding to people who look to their accountants as the first choice.

Also, to gain full benefit of economies of scale, the consolidator group must be united. The disparate businesses components often run by independent individuals, works against unity.

The premise for the consolidator model is based on a fast-growth phase. One or two person practices, pressured to keep up to date with tax changes and other matters, initially benefit from consolidators’ back-office systems.

But the new systems bring fees the practice did not have to pay before. The new fee structure initially detracts from the bottom line.

Perhaps the most significant indicator of the sentiment change is the failed merger between Investor Group and PKF. Calling off the merger in late June, PKF explained that “working for a corporation with shareholders who treat the practice as purely a business is less appealing, particularly when you don’t know what business you might be in”.

The presence of consolidator groups in theMoneyManagementTop 100 is also mixed. Last year, Harts held the 35th position. This year, it has not registered at all.

Of those gaining a ranking, the largest is Deakin Financial services ranked at 28 with 143 financial planners, last year it ranked 31. Deakin has not consolidated accounting groups, but rather financial planners and risk insurers.

The group, according to managing director Murray Hills, is seeking further opportunities to grow the number of advisers in the dealer group through acquisitions.

He attributes the stock market’s downgrade of the consolidators to a failure by the groups to fully extract the anticipated savings.

Hills expects the group to break even this financial year, as he says Deakin is now focused fully around financial planning and life insurance broking. All activities outside this have been disposed off.

Stockford is the only other consolidator to appear in the Top 100, at 40, reversing the trend by climbing from 47 last year. It has added 10 planners to give it a total of 70 this year.

Stockford has acquired 53 firms, mostly accounting practices, and now has about 60 offices nationwide.

Investor Group has been the most active consolidator over the past 18 months, with four acquisitions in the first four months of 2001, six in the 1999/2000 financial year and four acquisitions by its own members’ firms as well.

However, it does not appear in the Top 100 list. According to Collins, this is due to the fact that the group does not count its advisory staff as planners and thus falls outside the parameters of the list.

Managing director Kevin White says: “We focused on making individual acquisitions to develop large regional groups. To a degree, that original aim is almost completed.”

Since listing in July 1997, the group has built 14 regional independent firms, one in New Zealand and three stand-alone financial planning businesses.

Stockford chief operating officer John Barkla is also standing by his group’s model. Barkla, previously managing partner of HLB Mann Judd Victorian Partnership, explains the rationale to consolidate has not changed.

“We outgrew our partnership model. It became prohibitive for incoming partners to buy-in — reaching $600,000. We reached the threshold of the number of non-accountants we could employ. Younger people wanted a wealth strategy. Female staff wanted less of a boys’ club.”