The Results – Radar’s Survey

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Financial Planners and the Future of Financial Advice Reforms

Consultancy firm, Radar Results, has done a survey of financial planners, to gain feedback on the Future of Financial Advice Reforms, which are expected to be implemented in July 2012. The survey required answers to questions about the adviser’s gender, age and whether they own the business.  Over 85% of responses (349) came from males and 66% were aged 45 to 64. Radar’s survey revealed a high proportion were self-employed, 319 in total, or 78%. The principal of Radar Results, John Birt, said he was surprised by the high level of self-employed, but, then again, the new reforms would have a greater impact on business owners than on their employees.

A total of 405 financial planners responded, with 584 comments and remarks. Mr Birt said, “I was taken aback by the number of comments and the many business owners who said they would have to lay off staff, or even close their doors. I once owned a planning business that took 20 years to build and, if a sudden change in the law had seen its value plummet, I wouldn’t have been happy either.”

All the 584 anonymous comments, some of which were quite lengthy and impassioned, together with the overall results, will be passed on to, The Hon Mr. Bill Shorten MP. The results will also go to every member of the newly-formed 18-member advisory panel on Financial Advice and Professional Standards.

There were other interesting responses to the survey: when asked the question ‘Which of the following proposed reforms do you want?’ 91% of respondents (356) said ‘no’ to the Opt-In proposal.

Furthermore, 57% (233) answered ‘very likely’ when asked ‘With each client having to sign an agreement every year [by opting in], do you think you will lose clients? ’ and 20% answered ‘somewhat likely’; a total of 77%. Other questions in the survey revolved around the size of the business based on Funds Under Management (FUM): ‘Have you moved to fee-for-service yet?’ and ‘How will the new reforms impact on your business?’

To view the results online, minus the comments, click here. Open until 14.12.2010

To request a copy of the results, including comments, send a blank email to survey@radarresults.com.au

Financial planning valuations – History is not a good guide

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Past sale prices of financial planning practices are really not a good indicator of how much you should pay for them in the future. The past is the past, and if someone paid 3x, 3.5x or even 4x, the recurring revenue (RR) for a business previously, what relevance would that have for today’s purchaser? Very little, I would say.
Planners have tended to look at past transactions to guide them for the future. If, in 2007, you purchased a FP business at 3.5xRR, and the RR of the business halved during 2008/09, you will have ended up paying 7xRR.
Towards the end of the GFC planners thought they could acquire a FP business at a bargain price. They paid RR multiples of around 3x or more, hoping revenues would double and therefore halve the RR multiple they had paid to, say, 1.5x. This didn’t quite happen, but some planners did pick up bargains and, from March 2009 onwards, some made nice recoveries.

Looking to the future. What prices are planners asking for their financial planning businesses today? Through Radar’s marketing, we have developed a summary of nearly 100 practices wanting to sell. Approximately one third of these practices do not provide a clear sale price, but simply say ‘price and terms negotiable’.
The balance are asking for between 2x and 4xRR; however their asking price averages out at 2.79xRR. Larger practices, which ask for a multiple of EBIT, were excluded from this exercise. Note that 2.79xRR was the asking price, the eventual sale price being somewhat less.
Sale terms will also change, from the seller requiring only a 20% clawback to meeting half way at 25-30%. Instalment payment terms will also alter during the sale-negotiation phase, possibly ending with a final instalment after 1 year; whereas the purchaser may have originally required 2 years.
In the future, I see accounting sale multiples blending with FP multiples and moving away from the ‘recurring revenue scenario’, which has existed for the past decade. Looking ahead, total revenue and EBIT will form the new valuation methods. The larger practices and institutions will consume the smaller players, and RR valuations will disappear.

What should you pay for a financial planning business?
Based on acquisitions made by clients of Radar Results over the past 4 years, it’s apparent that risk insurance portfolios are ‘king’, followed by accumulator client registers. The perceived value of the portfolios of older investment clients, many of which were ‘smashed’ during the GFC, is certainly not as high as it once was. A reducing investment-account balance, as retirees live off their money, together with a lack of cross-selling opportunities, has seen them fall from grace. During the 1980s and 90s the retiree market was sought after, due to the easy servicing of their portfolios; they were always on holiday and never annoyed you.  
Today buyers are more cautious, and if they are going to pay 3xRR for a business then it needs to perform. The ability to increase the revenue by selling aligned products, a better value proposition through IT enhancements, and reduced expenses from dealer’s fees, have all encouraged quick growth by acquisition. Adding a $400K book to your business can instantly increase the bottom line by $300K.  So, at the right price, why wouldn’t you do it?

An indication of FP prices today:-         

                               City           Regional

Retirees                     2.5x               2x
Accumulators             3x                 2.5x
Risk clients          3.5 to 4x          3 to 3.5x
SMSF any age        3 to 3.5x        2.5 to 3x
Corporate super      1 to 2x         0.5 to 1.5x

The multiples above can vary depending on terms offered by the vendor, actual location of the clients, client ages and the particular investment products recommended.

Can you sell a volume bonus?

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Consulting firm Radar Results (Radar) has provided valuations to the financial planning industry for many years. It became apparent volume bonuses were to be securitized by the government as being an incentive paid by the product provider to attract funds under management (FUM) and hence, may be banned. The latest Financial Services Reform paper released 26 April 2010 has confirmed this scenario.
 
Since 2008 Radar has not included the revenue from volume bonus payments in valuations based on recurring revenue multiples. It’s difficult to see how the government can legislate to stop volume payments being paid under a different disguise. The payment of a volume bonus or over-ride has been a common practice amongst many platform providers to attract and retain higher FUM. The platform providers, who seem to be the main culprits, may pay the bonus under a different name, say “a marketing allowance”. It’s also been muted that advisers may end up buying their own platform, which will then pay the adviser the volume bonus in the form of a higher Adviser Service Fee (ASF).
 
The dilemma is that when selling a financial planning practice today, should you include the volume bonus in the calculation of recurring revenue? It’s been common for advisers to receive the minimum ASF of say 0.4% plus another 0.2% as a volume bonus, often paid monthly in one lump sum, quite separate from ASF. Advisers may need to convert their clients to a true “fee for service” arrangement by 1 July 2012 and then substitute the “lost” volume bonus as a higher ASF. With revenue multiples falling combined with lost volume bonuses, the value of a planning business could be worth a lot less. Radar provides advisers with a free appraisal service – go to Appraisals on our website if you wish to receive an appraisal by email.
 
INSURANCE COMMISSION BANNED OR REPLACED?
 
The Cooper Review is particularly harsh and we would be surprised if it’s implemented in its current form, especially in relation to risk insurance. The debate between industry funds and the non-industry fund financial planning sector is ridiculous. The industry funds should be tipping all the costs of those adverts back into their member’s super accounts. If I had an Industry Fund, I wouldn’t be too pleased seeing all that money wasted. As a whole, its effect on the financial planning industry is serious and unwarranted. Many advisers who have relied on trails and commission for their lively hood over say 20-30 years, particularly life insurance agents, will be seriously affected by the Cooper Review; a Review which some say is politically motivated. 
The government wants the adviser to replace the commission that’s paid by the insurance company from selling an insurance product, with a professional fee. They (the government) would also like financial advisers to eventually replicate the fee system of accountants and lawyers. The perceived benefit to the superfund member is a higher end payment at retirement. The work that’s been provided to the member/client now needs to be paid directly to the adviser by the superfund member. This could be a very difficult task, invoicing and collecting all these fees. The signing of an annual Renewal Letter by the client also makes this servicing task more difficult and brings into question client retention. After June 2012 the member may have to pay for advice on any insurance within a superfund. So, how does the financial adviser replace the banned commission that he or she had been receiving on the existing insurance policies if the superfund member decides they don’t want any ongoing service?

Commission ban, compulsory renewal notices and Free workshop for planners leaving the industry.

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Your client’s interests must be placed ahead of your own under proposed legislation issued on 26 April 2010 by Minister Chris Bowen. The new reforms, which apply from 1 July 2012, will place advisers under the Corporations Act in respect to a financial adviser’s fiduciary duty. This is similar to the fiduciary duties and obligations as a company director and may carry the same penalties for breach. Therefore, advisersAFA Logoshouldn’t be too worried about being sued for poor advice under any civil action; the penalty under the Corporations Act may be similar to that of a company director and deemed a criminal offence, with fine and possible jail sentence. Currently you cannot be an Authorised Rep or hold your own licence if you have a criminal conviction. This will certainly beef up the responsibilities placed on financial advisers, their licencees and more importantly, protect the consumer.In relation to trail commissions being banned, compulsory annual renewal notices and these new reforms being retrospective, I pose the following comments and questions:- Existing agreements between clients and their advisers for the payment of fees and services supplied may not be retrospectively affected by the new legislation, however, any “change” in the advice or service offered ie new advice, may well be deemed that a new agreement has commenced. Then the opt-in commences?

 

 

As a consequence of this “change” to the existing agreement and if a new product or investment is implemented for the benefit of the client, then no fees will be payable from the new product, whether trailing or upfront. Therefore, if all clients are reviewed and changes made over several years, basically all trails will disappear. Was this the intention of the Government?

 

If advisers don’t change a client’s investment or strategy for fear of losing their trail, they may be deemed as no acting in the best interest of the client therefore they’ll be caught under the Corporations Act i.e fine, jail, loss of AR or licence.  This is a predicament that advisers may find themselves exposed to and needs industry input and clarification by Bowen.

 

Workshops for planners retiring or just leaving the industry

Radar Results will be holding a series of workshops to help planners leave the industry and understand the complexities when selling their practice or client registers. Specialist lawyers and other consultants will be able to answer all your Relaxquestions. Some of the topics to be discussed are “How to value your business? The role of a lawyer and accountant in the sale. Vendor trade restraints, claw-backs, transition periods, client transfers and information memorandums. First workshop is in Melbourne Tuesday 15th June Boardroom Hall Wilcox Lawyers 12-2pm. Free with lunch provided.

Sydney will be held Tuesday 6th July 12-2pm. Free and lunch provided. To book please email michele@radarresults.com.au or phone Radar’s Operations Manager Michele Conroy on 02 4384 5670. Brisbane and Perth workshops to be held in late July and August 2010.

 
Samantha Aad – Business coach implementation specialist
 
Samantha has commenced working with clients of Radar Results to help them implement their business coaching advice. You may have used a business coach in the past but have you put their advice into action? As Paul Dunn’s boot camps and the Results Corporation Workshops advised during the 80’s and 90’s, the only problem with business coaching is FTI (Failure To Implement). Samantha solves that problem. She implements the strategies for you. So if you have that problem, call Samantha on phone 0414 927 354 or email sam@paraprofessional.com.au.
 
 

 

 

1 in 4 Planners to leave – Radar’s poll results over 700 responses

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After Chris Bowen announced on 26 April 2010 new legislation will be introduced affecting commissions, trails, review fees, volume bonuses and upfront fees, Radar Results conducted a poll. Radar Results polled financial planners and other financial service industry people asking “How will Chris Bowen’s new laws (2012) affect your business plans?”

We received 732 responses with more than half suggesting their business plans would be affected by Chris Bowen’s new reforms with more than 1 in 4 respondents leaving or retiring sooner from the financial planning industry.

Some 12 per cent (87 respondents) said they would retire sooner, 14 per cent (101) said they would sell part or all of their business, and 16 per cent (115) said they would leave the industry. Some 44 per cent (324) would not change their business plans as a result of the reforms

Many suggested it would be positive, allowing them to expand and acquire more practices.

Those polled and said the reform laws would not change their business plans totalled 324, or 44% of the responses.

 

How will Chris Bowen’s new laws (July 2012) affect your business plans?

Number of responses

Response ratio

Retire sooner

87

12%

Sell part or all of your business

101

14%

Expand through acquisition

105

14%

Leave the planning industry

115

16%

No change at all

324

44%

Total

732

100%

Radar Acquire New Division for Accounting Practices

Acquire Logowww.radaracquire.com.au

The group’s operations manager, Michele Conroy, announced a new division will commence this week specialising in the acquisition of accounting practices. The name of the new service will be Radar Acquire.

Conroy said “the demand by Radar’s existing clients to acquire accounting practices has been growing for several years. We see more of our financial planning clients adding accounting practices to their business, and this is a trend that would only continue.”

The group’s managing director, John Birt, has been working with accountants for more than 26 years and he’ll be using his experience to run this new division, Radar Acquire. 

Birt said, “It’s a natural progression of our company (Radar Results) and will complement our existing structure and will be supported by our existing associates nationwide. I see the sale price of accounting firms and financial planning firms overtime moving closer together, particularly with the new fee for service legislation that Chris Bowen wants to introduce.”

Government’s Future of Financial Advice Reforms Paper

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     Office of the Hon Chris Bowen MP
         Minister for Human Services
Minister for Financial Services, Superannuation
               and Corporate Law

THE FUTURE OF FINANCIAL ADVICE
INFORMATION PACK

MONDAY 26 APRIL 2010

To access the Government’s Future of Financial Advice reforms paper. Click on the below link

http://ministers.treasury.gov.au/Ministers/ceba/Content/pressreleases/2010/attachments/036/Future_of_Financial_Advice_Information_Pack.pdf

Message from the Minister

The Government recognises the important role played by financial advisers1 in assisting people to
plan for their future. Longer term challenges such as the ageing of the population, as well as
recent events such as the global financial crisis, underscore the need for quality advice.
It gives me great pleasure to announce significant reforms to the provision of financial advice,
which I believe will improve the quality of advice, strengthen investor protection and underpin trust
and confidence in the financial planning industry. These reforms should ultimately encourage
more people to seek financial advice.
This package represents a comprehensive Government response to the recent Inquiry into
Financial Products and Services in Australia by the Parliamentary Joint Committee on
Corporations and Financial Services (the PJC Inquiry, see Attachment A), which was set up in the
wake of collapses such as Storm Financial and Opes Prime.
In this respect, the Government’s response is guided by two overriding principles:
• financial advice must be in the client’s best interests – distortions to remuneration, which
misalign the best interests of the client and the adviser, should be minimised; and
• in minimising these distortions, financial advice should not be put out of reach of those who
would benefit from it.
The Future of Financial Advice contains three key reforms, which will apply from 1 July 2012:
• A prospective ban on conflicted remuneration structures, including commissions and any
form of volume based payment. In addition, percentage-based fees (know as assets under
management fees) can only be charged on ungeared products or investment amounts.
• The introduction of a statutory fiduciary duty for financial advisers requiring them to act in the
best interests of their clients and to place the interests of their clients ahead of their own
when providing personal advice to retail clients.
• The introduction of adviser charging regime, which retains a range of flexible options for
which consumers can pay for advice and includes a requirement for retail clients to agree to
the fees and to annually renew (by opting in) to an adviser’s continued services.
The reforms also significantly expand the provision of low-cost simple advice (known as intra-fund
advice) to areas including transition to retirement and the nomination of beneficiaries. There will
be a review of whether other measures are needed to clarify whether simple advice can be
provided in a compliant matter outside intra-fund advice.
I welcome the significant efforts of industry, including the Investment and Financial Services
Association (IFSA) and the Financial Planning Association (FPA) to remove commissions. The
reforms clearly support their efforts by introducing enhanced standards that apply across the retail
financial services industry. The reforms will greatly reduce the incidence of investors being
recommended financial products as a result of sales incentives offered to advisers. Clearly, clients
should receive advice that is in their best interests.

Chris Bowen

Minister for Human Services, Minister for Financial Services, Superannuation and Corporate Law

1 The reference to the term ‘financial adviser’ in this Information Pack generally refers to those who provide ‘financial
product advice’ under the Corporations Act 2001.

Planning Practices Sales Up

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Consulting firm, Radar Results is seeing more sellers of financial practices come to market, particularly larger sized firms.  John Birt, Managing Director for Radar Results said “Currently our clients are looking at purchasing 10 planning practices which should sell for at least $5 million. We have found 5 of these practices since December 2009. ” Mr Birt goes on to say “Owners of Dealerships are also looking to exit the planning industry due to their profits being lower, often into the red. At the moment we have a number of dealerships wanting to talk to our clients about selling.”

The trend for using a consultant or buyer’s advocate commenced in 2005 with Radar Results pioneering the way. Since then a number of buyer advocates have sprung up, all doing very well. Mr Birt believes competition is healthy and often the advocacy firms refer to each other when it’s in the interest of helping a client.

On the flip side, using a broker to sell your business can be a very expensive and unrewarding exercise. Often their process can cause the sale to be delayed; sometimes well over a year expires with no result, not to mention the 5-10% commission you have to pay.

 A good buyer’s advocate will allow their client to meet a suitably matched seller and have the whole deal completed in 1 to 2 months. It’s a private consulting experience that’s offered by Radar to the financial planning industry, rather than a broker flogging a business to all and sundry. A dangerous aspect of this “sell to anyone” mentality is that the staff will find out that you’re selling – since its broadcast everywhere! You then have quality staff leaving to find a safer employer which can affect the sale price. Another downside is the time wasted being introduced to buyers that are not a cultural fit, or matched to your business model.

Radar feels that offering a business to hundreds and thousands of people doesn’t respect the seller or the seller’s clients. It can take you 20 years to build a good client base and many of them (the clients) become friends. Selling them at an auction is like “selling meat carcasses to a butcher”. It’s usually not what planners had in mind when they took that first step towards retirement.  

Radar Results is running a series of Workshops in May and June to address these issues. Workshops are being held in Melbourne and Sydney shortly. Contact Radar’s Operations Manager, Michele Conroy on michele@radarresults.com.au for an invitation.

 

 

 

Selling Multiples

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Insurance registers in high demand

Life insurance registers continue to be in extreme demand from financial planners who wish to expand their business. These registers, commonly called “books of business,” would include life insurance, trauma or crisis cover policies and income protection. To date the main demand has been from capital city based advisers although regional based advisers are also after these types of books.

“One swallow doesn’t make a summer”

Some advisers are now predicting an increase in their recurring revenue of up to 50% for the next few years. It’s nice to be optimistic, but it sounds like 2007 again. It could be a good time to take stock of where yourGlasses business is currently, and factor in either no increase in revenue, or a fall in revenue due to market downturn. However, one way to guarantee an immediate revenue increase is to buy a client base, as long as the price is right. But what is the “right price” multiple you should pay today?
Recently there’s been publicity surrounding particular acquisition multiples that have been paid to sellers. This publicity can set a dangerous precedent. Advisers, who may be thinking of selling and feel summers here, could be bitterly disappointed by the end of negotiations! Advisers who have wanted to sell their business in the past have used Radar Results to provide them with an appraisal of what it’s worth. Their own price expectation may be based on a recently published “one off “sale result at a high price multiple. The adviser identifies with this sale price multiple, and expects to achieve the same result. What’s that saying; one swallow doesn’t make a summer?
Possibly the high recurring revenue multiple may be influenced due to exceptionally generous terms offered by the seller, like a 5 year payout term. Or the reverse, 100% upfront payment for your business, no transition work offered and no clawback provision which would make the multiple reduce spectacularly. I recall when Radar first provided appraisals, the price paid by our client reduced by over 20% because he offered a purchase price 100% upfront for the financial planning business. 
JigsawSetting a high price expectation to attract sellers is almost like a real estate agent desperate get a listing and provides an appraisal that’s totally and commercially unrealistic. At first you believe them, only to find out months later, it’s false. You then find yourself having to accept a far lower price, the salesman still get’s his commission, and he never has to face you (the vendor) again.  This isn’t helping advisers leave the industry in a caring and respectful manner. It also can leave the vendor with resentment from being under-valued, and with a bad taste in their mouth thinking they should have got more for their business. If you’d like an appraisal for your planning business or client register, just click on  Appraisal Questionnaire.
A well priced financial planning business can sell in a few weeks, or even sometimes sooner. For this to happen you must also be located in an area or region where there is high demand, otherwise you may remain unsold for a longer period. Some banks are still not that keen on providing finance associated with the purchase of financial planning practices, and others limit their lending to 1.5x to 2x the recurring revenue, or 75% of 5x EBIT. These limitations have been in place since early 2009 and make the purchaser provide a higher level of cash or security to secure the finance. This has also affected industry prices.

Deal breakers when selling your financial planning business

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If you’re planning to sell your financial planning business you’ll need to be aware of some obvious and not so obvious deal breakers.  Besides price and terms being the obvious ones, there are some surprises in store for the unwary seller.
If you’re an Authorised Representative of an AFSL and looking to sell, Radar has had buyers come back saying “my dealership is not happy with the compliance of the vendor’s business” or “my dealer doesn’t like the products they’ve been using”.  A seller may impose a deal breaker themselves such as “I’m happy to sell but you must join my dealership”.  Another deal breaker isolated to a vendor’s business that has multiple partnersNegotiate would be the requirement to buy-out one of the partners. This can stop many buyers from getting past first base.

Consultants like Radar Results can introduce sellers to a matched buyer; matched on location, price, terms and business style. Radar may then be able to also arrange an indicative finance approval to see if the buyer qualifies before moving too far into the transaction. Radar also canvasses and identifies trouble spots in a transaction well before they appear.

But there are the less obvious deal breakers If your business is run by a company then the ownership of the clients need to be confirmed.  Are they owned by the adviser, the private company or some other entity, usually a trust?  If the clients are owned by a company, do you want the buyer to acquire the company shares, effectively taking over the company and its responsibilities? Usually the buyer’s answer is no, so the deal stops immediately.
Another deal breaker could be the lease on the vendor’s office. The seller may want the new owner to take on this lease, thus keeping the clients going to the same location, enhancing client Negotiateretention and passing on the cost to the buyer. Not a problem if the buyer needs an office; likes your office and feels there’s a commercial advantage in taking on the lease. However, often buyers already have their own office and only require your client’s revenue to add to their bottom line. Buying the clients is one thing, taking on a lease is quite another. This can be an instant deal breaker.
Staffing is another possible deal breaker. Often a mature business looking to expand already has adequate staff. The vendor’s push for existing staff or family members working in the business “to go with the business” can be a deal breaker. As well, the retiring adviser may want a salary for several years after signing the contract and depending on how much they ask for, and for how long, can jeopardize the sale. I’ve seen qualified experienced planners ask for as low as $60,000pa and up to $250,000pa.
Within the terms of a sale, a claw-back or rise and fall clause can be negotiated.  A sale without any claw-back provision can cause a buyer to shun the deal day one. Transition of the client relationship to the new owner is usually required by the buyer, and if this is not being offered, the transaction may never start.
As you can see, there’s a lot of information and questions that need to be answered upfront to save time and effort from both the buyer and the seller – and these questions are not always obvious.