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

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?

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.

Radar Acquire New Division for Accounting Practices

www.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. 

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.

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 partners 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 retention 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.