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Over the past 2 weeks, as a consequence of the recent FOFA announcements, a number of Radar Results clients have said they will not now pay the same level of recurring revenue, or EBIT multiple, that they were prepared to pay before the FOFA announcements. Depending on the style of the planning business, the products used, the client ages and, in particular, their current fee arrangements; Radar Results has seen a decrease in many financial planning firms’ valuations. Radar Results valuers have reduced EBIT multiples by 0.5X since the recent FOFA announcement, equal to a reduction of approximately 10% of a practice’s value.

In the late 1990s I recall being asked to visit a retiree in Charlestown, Newcastle, who had invested $450,000 with a local planner 3 years earlier and, since investing, hadn’t seen the planner again, although he was working in the CBD some 12 minutes away. The retiree was after some service and wasn’t happy; he had been receiving a quarterly statement directly from the licensee for the funds under management (FUM) that he held. The FUM was held entirely in one Master Trust, and the licensee was being paid an annual service-fee payment of 0.8% or $3,600; so over 3 years the retiree had paid $10,800 to his licensee and planner, and had received basically no service. That’s what FOFA wants to alter; as The Hon Bill Shorten, MP, said in his press release on 28 April 2011, “The policy reflects the need to ensure that advisers do not charge ongoing fees where the client is receiving little or no service.”

Shorten went on to say that “volume rebates from platform providers to dealer groups must cease”. Herding clients into a particular administration vehicle for the financial benefit of the adviser and licensee may not be considered credible. Irrespective of whether there were other reasons for substantially using one particular platform, FOFA will eliminate any temptation for revenue to be paid based on volume.

A concern I have with FOFA is the proposal for a 2 year Opt-in. An annual renewal notice must still be sent to all clients specifying what work was performed by the adviser in the previous year, and what was received by them in fees over that period; as well as providing the same details for the coming year. The only difference from the first reform paper, on 26 April 2010, to this latest announcement (28 April 2011) is the requirement for the client to sign, i.e. Opt-in, every second year. If the client is unresponsive or, in other words, if you can’t find them to sign, you must stop taking the commission, trail or service fee.

 But of far greater concern is the Government’s inability to outline a definite grandfathering arrangement. Grandfathering has been presumed by most advisers to be automatic, however, Shorten’s recent statement that “issues around grandfathering arrangements will still be subject of further consultation” is certainly not what planners wanted to hear. The question is whether life insurance agents, who have been building up client registers for many years, may have a part of their register rendered worthless. Certainly, retail risk policies written inside a personal super plan seem to be in the firing line.

Also, the Government’s FOFA proposals have watered down the adviser’s fiduciary duty to a ‘statutory best interest duty’; stating that they, the individual adviser, will not be held financially liable for any breach of their duty.

Last, but not least, is the Government’s tougher stand on gearing. The 26 April 2010 paper banned any adviser fees being charged against the component of an investment that’s geared, but last week Shorten said “an asset-based fee cannot be charged, even on the ungeared component.” This is certainly an attempt to discourage gearing; and any financial planning practice that has a large component of clients geared may need to take swift action to protect their revenue, and the value of their business.

Fiduciary duty ‘beefed up’

 

Fines for financial advisers breaching their fiduciary duty could increase dramatically, moving the current maximum fine of $500 up to $200,000 when new legislation is introduced next month. The Government wishes to amend the Corporations Act to explicitly include a statutory fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.

 

Currently an authorised representative’s defence is to simply rely on the Licensee’s instructions and advice. If this new legislation is passed, then the authorised representative becomes liable. The proposed reform may place the adviser (authorised representative) in a position similar to that of a company director, where if found to be reckless, the fine under a civil action may increase from a maximum $500, to $200,000. If ASIC also decides to be involved in the complaint, then the new reform will allow for criminal liability, and a prison sentence of up to 5 years. At the moment, it’s not considered a criminal offence if an adviser is found guilty of being reckless, and not acting in the client’s best interest. The new law will allow for court awarded compensation, paid by the adviser to the client.

 

Media reports have indicated that planners feel that the fiduciary duty that currently exists, is not much different to the one that’s being introduced to parliament next month. In summary, we now have a $500 fine, no jail, no compensation and next year, $200,000 fine, 5 years jail and compensation. It would be interesting to see if any court awarded compensations will be covered by Professional Indemnity insurance if the adviser is found to be ‘reckless’.

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.

 

 

 

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 questions. 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.

 

 

     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.