Financial planning practices overpriced: Shadforth

Too much is being paid for financial planning practices that Shadforth Financial Group feels may not retain their value.

Shadforth chief executive Tony Fenning said there were definitely more practices becoming available driven by an aging demographic but also expected pressure on revenues due to regulatory change.

“There’s no doubt that it’s going to be two or three times harder to be a successful adviser in the next decade than it was say in the 90s,” he said.

While Shadforth was seeing plenty of opportunities for acquisitions, Fenning said Shadforth was not willing to pay vendors what they were asking. He added therefore, a range of people, from small one-man bands and new entrants to the industry, to large institutions, have outbid Shadforth.

“But in our eyes people are overpaying for them,” Fenning asserted. “The effects of the regulatory regime are that those practices are worth less today than they were a year ago or a five years ago or 10 years ago, and they’re getting worth less each day or month or year.”

He said those practices that have been operating under a commission-based model would gradually see their value disappear as the world moved on to fee-for-service.

“The problem is that typically people are not bringing in a whole bunch of new clients into these businesses — they’re living off the glory days of the past,” said Fenning. “At this point we’re not increasing our bid and we’ll wait until the market comes down to a sensible level.”

Fenning asserted that buyers are focusing on revenues when they should be looking at underlying profit.

“We think that the days of paying a number based on revenue — which many people still seem to be doing — should be over,” he said, adding that it does not reflect anything.

“We’re only really interested in the underlying profit of the practices and a lot of them don’t have much profit. The profitability of the practice is as much buried in the underlying funds that are still billed by the institutions rather than in the financial planning piece itself, and because we don’t see that continuing we don’t see those fat margins continuing. I guess we’re looking at it with fewer dollars in our eyes than the people that want to hold onto those margins for as long as possible.”

Fenning said in the meantime, Shadforth was ready to invest further in improving efficiencies at both a client and adviser level through investment in software and product platforms. He said while its BT Wrap and direct-shares and non-platform product offerings through Praemium have offered more diversity to its client base, Shadforth was revisiting its clients’ exposures to cash and fixed interest investments as the world moved on from the cautious days of the global financial crisis and considered what alternatives were on offer.