Can you sell a volume bonus?
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?
