Pressure rising on planning practice values
Structural reform taking place in the financial advice industry is putting downward pressure on financial planning practice sale values.
The head of acquisition and succession for AXA’s financial advice network, Steve Davison, said financial planning practices were losing value in terms of recurring revenue multiples. Davison said AXA was already seeing multiples come down to around 2.7 times recurring revenue, down from 3 times recurring revenue 18 months ago.
He said the introduction of fee-for-service models would see a polarisation in the market where, on the one hand, clients would be willing to pay fees that reflect the true value of the advice provided.
“But at the other end of the spectrum, we’ll see some clients happy to transact on a one-off basis when they have a need but are not willing to pay an ongoing fee each year,” he said.
“And that’s going to see some businesses’ revenues come off, which will, in turn, play through to their business value,” Davison said.
Business broking firm Kenyon Prendeville’s latest figures show average prices achieved across Australia over the 2010 financial year amounted to a 3.3 recurring revenue multiple. But this is a fall compared to previous years, and Kenyon Prendeville’s data over three years reflects a downward trend in sale prices for planning practices. In 2009, planning practices were attracting an average of 3.45 recurring revenue sales, compared to 3.55 in 2008.
Townsend Business and Corporate Lawyers principal Peter Townsend expressed concern over the buoyancy of the market once the ban on commission payments is introduced. He predicted a change in business models would drive prices down.
“If accountants get 0.9 [recurring annual revenue], why would a financial planning practice get much more than the accountancy practice?” he asked.
However, co-founder and director of Kenyon Prendeville, Alan Kenyon, argued reforms would not impact the valuation of financial planning practices, as demand for planning practices would remain strong. Kenyon said the supply/demand dynamic for planning practices still favoured vendors, although “there are more businesses coming to market for a whole bunch of reasons”.
He added there were currently two types of buyers for financial planning practices.
“There will be those that will want to buy businesses that haven’t made that transition [to a fee-for-service model], because they’ll see the opportunity in transferring those businesses and getting an uplift. And there will be those who’ll buy businesses that have already or are well underway with that transition,” Kenyon said.
“So, as long as you have demand exceeding supply, prices are going to be strong,” he added.
Davison agreed with Kenyon about strong demand for financial planners’ client books, but questioned at what stage would the demand reduce and supply increase.
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