Financial planning practices aiming to shift to a fee-for-service model ahead of Future of Financial Advice (FOFA) reforms could find their practices valued far lower by institutions, one practice sales broker has claimed.
While practice valuations generally remain steady at around 2.7 to 2.8 times recurring revenue, some institutions are beginning to value fee-only businesses at around a 1.5 times multiple, according to Kenyon Partners chief executive Paul Tynan.
This is especially relevant for practices focusing on self-managed super funds (SMSFs) or individually managed account (IMA) investments, Mr Tynan said. Kenyon Partners has already had a couple of SMSF-focused businesses come to market that were only being offered 1.5 times recurring revenue from their institution, he added.
Contributing factors include the lack of a product margin for the overarching institution and a lack of guaranteed ongoing revenue.
"With some of the larger players, you've had very high profile people saying to go fee for service and that it's the way of the future," he said, "but those same institutional people, when they go back to their work, are putting a lesser value on fee-for-service businesses inside their distribution, which is quite interesting.
"So a normal business, [operating] on a platform or getting commissions, is getting an average of 2.8 [times recurring revenue] but a fee-for-service business in SMSFs is getting lower multiples in a big institution because there's no product margin."
Many large institutions also don't value IMAs because there is no margin, he added.
"Margin is stripped out for the manufacturer; the planner gets fee for service plus the manufacturing margin so big institutions put less value on the practice," he said.
This development could eventually have an effect on values across the board, according to Mr Tynan. "Will the new valuations from institutions affect the open market? It will have to have an effect," he said.
Conversely, the valuations of risk practices are still holding up very well because of commissions and are still fetching at or above three times recurring revenue, he said.
SUBSCRIBE TO THE IFA DAILY BULLETIN
- 19 Sep 2018Linchpin funded advice business in liquidationBy James Mitchell
- 19 Sep 2018McMaster: Where was ASIC on Beacon, CBA and AMP?By James Mitchell
- 18 Sep 2018Peter Kell resigns as deputy chair of ASICBy Eliot Hastie
- 18 Sep 2018Two former Macquarie advisers given 10-year banBy Adrian Flores
- 19 Sep 2018Raiz addresses Millennial advice gap with chatbotBy Reporter
- 18 Sep 2018FASEA a ‘disaster’ destroying the industry: AIOFPBy James Mitchell
- view all