With the Future of Financial Advice (FoFA) reforms now live, there’s a lot of discussion lately around which financial planning assets are more attractive when considering either buying or selling (e.g. client servicing rights). There’s also a general public curiosity around what the buyer appetite in the current market is.
It’s clear that the regulatory changes are impacting the demand and supply of assets to the market. However, this can only be considered reasonable in an industry that’s adjusting to a new environment. Current supply remains strong, with a number of business owners looking to either downsize their client base to focus on their more active clients – or in the more extreme case, retire and exit the industry to avoid the administrative and compliance impact that the new regulations are likely to have on their business operations.
On the buyer side, demand has also remained strong. However, where once there was more of a focus on the size of the annual ongoing revenue (AOR), there’s now a shift to better understand the qualitative aspects of potential assets. Buyers are now more readily walking away from opportunities or demanding a price reduction in cases where low client engagement, compliance risks or lack of sustainability with revenues are identified. In essence, this is a return to what arguably should be fundamental criteria for any acquisition but may not have been as closely scrutinised in the historical market.
A simple ‘risk-versus-return’ analysis clearly demonstrates that revenue streams attached to engaged and connected clients are much more likely to result in a sustainable and recurring income stream following a purchase by a new adviser. Increased uncertainty and risk now exists around your less active clients, which means such assets are less likely to attract a premium in the current market. Although commissions and other conflicted remuneration may continue to be grandfathered under FoFA, they now also carry increased risks. In many instances, these may be your less engaged clients – they’re often harder to obtain quality information on. It could require greater costs and more resources to integrate into the buyer business which means buyers may not be prepared to take them on without an appropriate discount in price.
FoFA is without doubt posing more questions of sellers when taking assets to market. Meanwhile, buyers now need to consider what risks they’re taking when entering into a sale agreement, and how sustainable the revenue stream they’re purchasing will be. There’s also uncertainty with respect to whether grandfathering of pre-1 July 2013 revenue can be preserved upon a change of licensee, with buyers potentially less willing to pay for any such assets.
The good news is that the assets that demonstrate the right qualities continue to attract solid multiples. However, the days of financial planning assets trading at above three times recurring income appear behind us. Going forward, we can expect the most valuable financial planning assets will be those that can demonstrate strong client engagement and sustainable revenues. While we expect to see further softening in prices, we also foresee a wider range of transaction multiples emerging as buyers become more prudent in identifying what constitutes a quality asset in the new environment. Business owners who fail to effectively manage these dynamics can expect to see a significant decline in the resale value of their business.
Malcolm Arnold is Head of Client Succession at MLC and is responsible for the management of MLC’s buying and selling of client registers through the Connect for Growth program. The program helps advisers transition to retirement and helps growing and new practices to build their businesses.
