Look before you leap into a co-op

A range of new schemes have emerged over the past years offering financial advisers a form of ownership in funds management and master trust businesses.

A range of new schemes have emerged over the past years offering financial advisers a form of ownership in funds management and master trust businesses.

Intermediaries of funds management and superannuation products and services have, in recent years, watched from the sidelines as funds managers, including master fund op-erators, sell their businesses for very high price to earnings (P/E) ratios. These intermedi-aries feel they have been left out in the cold, as they have helped create the value in these businesses however they have not shared in the recently realised spoils.

Further, financial advisers are often faced with the problem of receiving a relatively low capitalisation of the income streams generated by their businesses when they are sold or transferred. This is due in part to the small scale of their operations and the low level of liquidity associated with ownership.

Accordingly, over the past couple of years, we have seen the launch of various schemes which purport to deliver to intermediaries a form of ownership in funds management businesses. These schemes purport to be easily disposable at the high P/E ratios paid for funds management businesses which they could never achieve in relation to the sale of their own small business on a stand alone basis. Examples of some of these schemes are: AM Corporation's associated Fiducian dealer group; AustAccount -- a strategic alliance forged by ANZ Banking Group and the financial planning group Protax; Symmetry - re-cently acquired by Perpetual; and Consolidated Financial Services.

All the current equity schemes purport to deliver to intermediaries an interest in a liquid asset in consideration for the placement of their clients' funds with a particular funds management entity. For example, say a fund manager has a value of $3 for every $100 under management. The fund manager undertakes to provide an intermediary with an ex-tra asset, above any normal commission that may be payable, equal in value to, say, $1 for every $100 of funds placed with the manager. In this scenario, at least two-thirds of the value created by the placement of an additional dollar under the management of the manager, would still be retained by the manager.

Each of the current equity schemes are different in operation, however, they all claim to offer the best solution. Many of the schemes focus on a listing on the ASX.

There are real questions, however, as to whether some of the equity plans will ever be-come a successful float. One only needs to look at the recent difficulties of Consolidated Financial Services has had in listing. An alternate proposition is a trade sale, such as re-cently occurred with the sale of Symmetry to Perpetual.

The introduction of CLERP 6 next year will cause financial services organisations to re-view their existing distribution strategies and restructure them. Further, it will cause ad-visers, who are licensees, to reassess whether they should retain a license, or join a large distribution hub. The net result will be that in the lead-up to the introduction of CLERP 6, and during its early years, advisers will be shopping around for the best base from which to develop their business. Accordingly, the aggressive distribution hubs will take this op-portunity of dislocation to offer advisers a full range of features in order to attract them to their hub.

One of the features these distribution hubs will claim to offer advisers will be a viable solution to the business equity issue. That is, how an adviser can best capitalise the value created when a client invests their funds under the advice of a planner. This issue will be far more important to advisers than the distribution hub providing an adviser with a good wrap service offering for the advisers clients.

The reality is, a distribution group will not be successful in attracting or retaining inter-mediaries when the musical chairs start to commence under the distribution shake-up leading up to, and following, the implementation of CLERP 6 unless the group addresses these equity issues.

The remuneration restrictions which registered insurance brokers are currently subject to, namely a prohibition from receiving remuneration that is based on the amount of business placed with an insurer, will fall away on the implementation of the single licensing re-gime proposed under CLERP 6. Accordingly, insurance intermediaries will also be per-mitted to participate in equity schemes similar to those being launched by fund managers. Therefore insurers will soon also have to address these issues.

Many of the current schemes are of questionable viability. Phillips Fox Lawyers and Phillips Fox Actuaries and Consultants have jointly been providing various funds man-agement entities with advice on the most viable equity scheme to offer intermediaries for that entity.

Martin Jamieson is a partner in Phillips Fox's financial services team