Emotional bonds hurt valuations: Hunts' Group
Close relationships with clients can end up haunting financial planners when they decide to exit the industry, according to Hunts' Group principal Anthony Hunt.
If a financial planner wants to increase the valuation of their business, they need to demonstrate that it produces quality earnings that will "still be around in a year's time" - and that means institutionalising their clients into the business, said Hunt.
"The client [must have] a sense that they're not just related to an individual planner, but they're actually working with a business that is supporting them," he said.
While Hunt conceded a personal relationship with the client is important, the "litmus test" would be: how would the practice cope if the planner took a three-month holiday?
"Would the business just come to a grinding halt, or would it continue to chug along all by itself? How do the paraplanners and the support staff work with the clients? Is there corporate branding and communication?" he asked.
Earnings can also appear to be uncertain to potential buyers if the financial planner is responsible for all of his clients' stock selection, Hunt added.
"If they've got somebody who's dedicated to portfolio construction and developing model portfolios …that's another good indicator that you've got a more corporatised business and it's less about the personal relationship with the planner," he said.
When it comes to the current state of practice valuations, Hunt said "the multiples themselves have held up a lot better than people were expecting".
However, the numbers the multiple is being compared to - whether they are revenue or earnings - are lower than they were pre-global financial crisis, he said.
"The actual cheque that's being cut is smaller, but it's because the raw numbers are lower rather than because the multiples have dropped off," Hunt said.
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