Insto demand elevating practice values

 Financial planning practice valuations have been dented by the global financial crisis and issues around the Government's proposed Future of Financial Advice (FOFA) reforms, but are being artificially elevated by institutions targeting extra distribution channels, according to former head of Asgard Wayne Wilson.

Regardless of the exact outcome of FOFA, institutions will want to control the end-to-end distribution and the entire margin to make sure their business model is secure, said Wilson, now the co-principal of strategy firm Hunts' Group.

Practice valuations have been damaged by the wealth destruction that occurred during the GFC, with a large proportion of the assets against which firms charged a fee now gone, as well as issues around FOFA. One key issue is opt-in, which if it is brought in will create uncertainty around the continuity of contract previously thought to be secure, he said.

But one factor propping up valuations is the fact that the boards of large institutions expect to maintain a growth in company profit of around 10 to 15 per cent per year, which means the wealth divisions of those companies have to perform similarly.

The problem is that a lot of the ongoing revenue in these divisions is based on legacy product business written in the eighties and nineties, with an average management expense ratio (MER) of around 300 basis points; but as that business disappears - for example, when clients retire - the new business replacing it is being put on platforms with a MER of 60 or 70 basis points, Wilson said.

That means for every dollar lost from a legacy product, institutions need to write five dollars of new business to maintain revenue, so to meet profit targets these companies will need to not just replace lost business, but multiply it, he said.

That process is underpinning and artificially keeping high the values of financial planning practices, he said.