Practice values at risk from Trowbridge

If implemented, the Trowbridge Report recommendations could “kill the industry overnight”, rendering many businesses unviable, say two valuation experts.

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by Scott Hodder - April 08, 2015 8 comments

Speaking to ifa, Forte Asset Solutions director Steve Prendeville said that introducing the recommendations would decrease the value of risk practices and make businesses “immediately uncommercial”.

“At the moment, risk revenue trades at about 3.5 times recurring revenue and investment planning is three times,” he said.

“What [a change to remuneration] is likely to do is bring the model down and we are likely to see it come down by more than 10 per cent, maybe 20 per cent. So it will come down to more align with financial planning.”

Mr Prendeville added that if the proposed remuneration model were to be implemented in its current form it would “kill the industry overnight”.

However, while the industry is reviewing Mr Trowbridge’s recommendations, “common sense will prevail” and it will be realised that the remuneration structures will not work, he said.

“What we are likely to see is not a capping of $1,200, because that does not reflect what will work, but it could be a capping that could be – instead of receiving 110 per cent up front – in line with 50 per cent upfront and the deferred payments sort of 20 per cent ongoing,” he said.

Echoing Mr Prendeville’s comments, Centurion Market Makers director Chris Wrightson said limiting adviser remuneration, which a lot of older advisers who operate as a single-person practice rely on, will push them to move out of the industry and even sell their businesses.

“If they reduce commissions dramatically you will see an exodus of quite a lot of the older, [single-person operator], risk-only-type advisers because they simply won’t make the living they used to,” Mr Wrightson said.

Introducing the proposed remuneration reforms will also see the value of risk advice practices decrease, he said.

“[The proposed remuneration model] effectively equates to reduced remuneration or more importantly reduced business earnings, and planning businesses are like any business – if you’ve got to forecast for reduced business earnings or reduced profits, the value of your asset falls,” Mr Wrightson said.

"If Westpac puts out an announcement that their forecast earnings for the next 12 months are going to fall, shares fall also.

“Clearly, if implemented, [the] value of risk planning books and risk advice practices will fall,” he said.