Risk valuations could suffer under clawback policy
The three-year responsibility period proposed by the Financial Services Council for advisers to retain commissions on risk policies sold could negatively impact the values of risk practices, according to Radar Results.
The values of insurance-based financial planning practices have increased over the past six years and can currently command around three to 3.5 times recurring revenue, depending on factors such as the demographics of clients and the value of the policies sold, according to Radar Results principal John Birt.
"When you sell your planning business, the purchaser would like some surety around the revenue, and would generally pay the purchase price over a year or two.
"With a clawback provision attaching to all new insurance policies from next year, the responsibility period offered by the vendor would have to increase to maybe three to five years," he said.
Birt said he represents about 200 buyers of planning businesses and more than half of those would be looking for risk businesses.
The feedback from them since the clawback policy was announced is that they weren't happy with it, and they suggested the policy would reduce the value of risk businesses.
There have been suggestions that the final shape of the FSC's policy may be toned back to something like a two-year responsibility period or a one-year responsibility period for hybrid commissions.
If measures such as these were adopted, that would have less of an impact on risk practice valuations, he said.
Guardian executive manager Simon Harris said risk practices have clearly held their value better than investment and super practices in recent years.
If all businesses were forced to move to a hybrid structure with a one-year responsibility period, business values would increase over the next three to five years as their trail books increased, he said.
"We have seen within the Guardian Advice business that practices that have transitioned to hybrid or level commissions … their business values have increased significantly," Harris said.
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