Diverger explores innovative ways to increase scale
Easing regulation has made it easier to be a licensee, but Diverger is still in talks to see how it can grow its scale, according to chief executive Nathan Jacobsen.
Speaking to Money Management, Jacobsen discussed the firm’s place as a small ASX-listed licensee and challenges with the regulator. Diverger provides services to around 146 financial planning firms, 3,000 accounting practices, and 603 licensed advisers.
The firm was in talks with Centrepoint Alliance last year about a merger but was unable to reach an agreement.
The Diverger bid, made in June 2022, was for a combination of cash and Diverger shares valued at $0.33 per Centrepoint Alliance share by way of a scheme of arrangement. However, in response, Centrepoint said it failed to reflect the firm’s strategic value.
Jacobsen said he is still keen for other possible agreements with other licensees.
“We believe in the argument of consolidation of key service providers and the benefits of scale they can bring. We are a small listed company so there are benefits to consolidation and having more capital available,” Jacobsen said.
“We are in a recessionary environment with growing costs and the need for scale is a response to that.
“We are still interested and remain in explanatory conversations, but it has to be with a company that can execute the deal.”
He said the firm has seen a difficult financial year 2023 with H1 underlying profit down 13 per cent to $2.9 million following lower revenue growth but is optimistic for the incoming financial year.
It has made four M&A transactions during the period that Jacobsen said put the firm on track to achieve its inorganic growth target. The firm is seeking to acquire $1.5–$2.1 million EBITA by FY25.
“For Diverger in FY23, it was a tough year with higher costs. We made four acquisitions to support growth which cost money and invested in our core operations and you don’t see a return on those until later on,” Jacobsen said.
“But in H2, we are looking stronger and are seeing growth momentum. We expect to see the return [from the acquisitions] so have revised our H2 outlook.
“We are on track for inorganic growth thanks to the acquisitions, on the organic front we have ground to make up.”
Jacobsen also discussed the challenges of being a licensee in the current regulatory environment and said it has actually become easier in recent years and should continue to head in that direction thanks to the Quality of Advice Review.
“The challenges of being a licensee are largely historical with the Hayne royal commission but now we are in a positive regulatory environment so have an opportunity to run the business more effectively and leverage technology more,” Jacobsen said.
“It has gotten easier over the last 12 months, I’ve got 30 per cent of my compliance’s team capacity back away from working on regulatory reform which is a meaningful amount. I think the Quality of Advice Review is positive for everyone and makes it easier on all fronts.”
However, even with less regulatory reform, there are still opportunities for the licensee environment to be improved, he said.
“Licensees add a lot of value to the regulator but don’t see that remunerated so we need innovation to the commercial business model,” Jacobsen said.
“We supervise and monitor advice at scale in a way that the regulator is not resourced to do but the commercial reward is not currently sufficient which requires us to innovate our own business models away from pure licensing.”
One way the firm has been doing this is via equity investments in financial advice firms they license. It has already carried out two investments in this way, one minority and one majority stake, and has two to three more in the pipeline.
The first, McGregor Wealth Management, was conducted for growth reasons and a second with Atkinson Saynor Private Wealth for succession reasons took place this week.
“The starting point is our investment criteria and what they are trying to achieve. We are invested as a shareholder, focused on their needs and growth strategy and helping them achieve revenue,” Jacobsen said.
“In the case of Atkinson Saynor, the principal wants to retire and it is too expensive for the employed adviser to meet the capital requirements to buy them out. So we are partnering with the employed adviser to buy the retiring partner out and will work with the employed adviser on a three- to five-year growth plan.”
AUTHOR
Laura Dew
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