Recent research from Mergermarket and Pitcher Partners shows there was a surge in mid-market M&A activity within Australia’s financial services sector in 1H18 – 63% higher than the prior corresponding period. And 78% of respondents in the survey expected this trend to continue.
As you might expect, the research said further transactions were anticipated “as banks divest non-core businesses following Royal Commission investigations into industry misconduct” – but given how we’ve recently covered the emerging “silver reservoir” of financial advisers looking to leave the industry as a result of recent reforms, it’s clear this forms part of a bigger picture.
Given this, how can we expect the advice industry to change?
If you’re part of said “reservoir” …
An increase in M&A activity may suggest a more liquid environment for any would-be sellers looking to exit the industry. But as Connect Financial Service Brokers chief executive Paul Tynan noted recently, those older advisers searching for an exit strategy may not have time on their side.
Tynan, who spoke with us recently about Australia’s licensing framework, said that planners may find their exit strategy “being made for them” if they aren’t cognisant of the regulatory, professional standards and technological changes upending traditional advice business models.
Valuations will likely tighten – and value assessments including multiples of recurring revenue, multiples of earnings before interest and tax or multiples of NPAT will be more closely scrutinised – especially if it could be determined that a planning business isn’t fully adjusted to the above changes.
Tynan added that time “is not standing still” for would-be sellers waiting for pre-GFC valuations – those days, he said, “are well and truly gone.”
… or if you’re a younger adviser looking to enter the industry
Given the broadening professional standards requirements for advisers, it’s not inaccurate for Tynan to argue new advisers will be entering the industry “weighed down by educational standards and regulatory costs.”
He said it’s unlikely these younger advisers will choose the “entrepreneurial” path as “acquisition of an existing practice and associated financial commitment is definitely not on the cards.”
“New-era business models and an increase in education debt,” he continued, “is going to make newly-qualified accountants and financial planners very selective when choosing their first employment role.”
As a result, most will likely initially choose salaried positions in financial institutions.
Disintermediation isn’t going away
Of course, given that many of said financial institutions have divested – or are in the process of divesting – their wealth arms, there may be fewer of those kinds of roles to go around in the future.
As buyer-of-last-resort arrangements are coming under increasing scrutiny across the board, those institutions remaining in the wealth space will likely be a lot more careful about which advice businesses they work with. All of this creates an uncertain environment for both older and younger advisers.
On the other hand, the numerous ways the industry is shifting as a result of technology, third-party support services and regulatory changes, we may soon see new business opportunities arise and discover new approaches to running a successful financial planning practice.
As always, we’ll keep you posted.
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