Retiring planners’ last resorts diminishing

The recurring revenue of many financial planning businesses has been significantly reduced as a result of recent share market losses, leaving many practice owners with a rapidly shrinking saleable asset.

Those nearing retirement may now be forced to delay their plans while they try to recover losses in funds under management (FUM).

At the same time there is a growing trend away from buyer of last resort (BOLR) agreements, with many dealer groups questioning the logic of the practice, according to Business Health partner Rod Bertino.

“Having BOLR facilities in place has lulled a few principals into a false sense of security, but many BOLR agreements are now being revoked, changed, and reviewed,” he said.

Bertino said there are a number of factors behind this trend, including compliance issues, with dealers paying higher multiples for ‘house business’, contradicting the provisions of both the Australian Securities and Investments Commission and the Financial Planning Association. Bertino said there is also a “business reality” element to the trend.

“BOLR agreements state that a particular financial planning business is worth ‘X’ amount. But when the marketplace says it’s not, then why would [a dealer] pay well above what the market would? Dealers would be asking themselves, does this make business sense?”

In Bertino’s opinion, BOLR agreements will not be viable in the future.

RetireInvest is one group that has ceased to offer BOLR agreements. Peter Ornsby is national manager franchise distribution at RetireInvest.

“We see the fundamental change of moving away from a BOLR, where there’s a straight obligation based on recurring income, which I think fundamentally isn’t the way businesses should be evaluated,” Ornsby said.

“My understanding is that quite a few groups have moved away from [BOLR arrangements].”

Ornsby believes financial planning practices should be evaluated on profitability, with succession planning being the preferred retirement model.

“Recurring income still has merit, but we have to start considering the profitability of the businesses in the valuation, because in the future that is going to take a bigger hold in determining what the value of a business really is.”

Ornsby said planners must begin succession plans at least five years before retirement.

“If you get to a stage where you’re a year out and you haven’t got your business to a point where it’s really saleable, you’re going to have problems getting people in the time frames that you want,” he said.

The latest market movements and changing industry trends may leave many retiring financial planners with diminishing options in the years to come.

According to research conducted by Business Health, the average financial planning principal is in their mid to late-50s, with 61 per cent of principals failing to have a formally documented succession plan in place.