An end to planning’s golden age?
The golden age of financial planning business valuations may have peaked with a combination of the Royal Commission, the Financial Adviser Standards and Ethics Authority (FASEA) regime and tighter regulation spelling particular trouble for practices reliant on grandfathered commissions and operating under an institutional licensee.
That is the bottom line assessment of leading business brokerage and consultancy firm, Chase Corporate Advisory with executive directors, Greg Quinn and Marcelo Fernandez producing an analysis which squarely points to the sellers’ market of the past five years and average premium valuations of 3.2 to 3.5 times becoming more problematic.
The pair predicted that, in the future, there would be greater polarisation in both the quality of financial planning firms and the valuation multiples those firms ultimately attract. However, they suggested that predictions of up to 57 per cent of advisers departing the industry as being probably excessive.
In doing so, they exampled a mid-sized financial planning firm in a large institutionally-owned AFSL with a Buyer of Last Resort (BOLR) valuation and a material level of trail commissions from super and investment products and the principles approaching retirement age in the next five years.
“Our advice to this type of firm would be to consider their options either under their BOLR arrangement or a contested trade sale as soon as possible,” the analysis said. “These types of firms face the greatest future valuation downside risk as either their existing trail commission will continue to come under scrutiny or will require a significant amount of work to re-engage clients and convert them into on-going fee-paying clients.”
The analysis also pointed to problems for firms with internal product integration (IMA/SMA/MDA or use licensee products) stating there was a real risk that recommendations from the Royal Commission would adversely impact such firms.
“These recommendations and subsequent legislation will most likely require you to engage in some restructuring to enable you to continue with your existing arrangements,” the analysis said. “At the moment the Royal Commission is looking at both vertically and horizontally integrated models with a view to eliminating both the perceived and real conflicts of interests within these models.”
On the upside, the Chase Corporate analysis pointed to a better outlook for mid-to large-sized financial planning businesses with 80 to 90 per cent derived from ongoing advice fees rather than trail commissions with “engaged clients in solid value proposition”.
“We expect that these firms will continue to attract a premium valuation into the future. These are generally firms that have already positioned themselves for the future and are ahead of the competition,” it said.
Recommended for you
ASIC has released the results of its first adviser exam to be held in 2025, with 241 candidates attempting the test.
Quarterly Wealth Data analysis has uncovered positive improvements in financial adviser numbers compared with losses in the prior corresponding period.
Holding portfolios that are too complex or personalised can be a detractor for acquirers of financial advice firms as they require too much effort to maintain post-acquisition.
As the financial advice profession continues to wait on further DBFO legislation, industry commentators have encouraged advisers to act now in driving practice efficiency.
