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Fewer buyers want advice firms amid education reforms, says broker

New adviser education standards have prompted many advisers to sell their businesses, but the mound of reforms in recent years is making those firms unattractive to potential buyers. 

A new report by industry watchers Centurion Market Makers states that there has been increased seller activity for smaller and single-person operations as a result of practitioners choosing to exit the industry ahead of the new education standards.

However, over the past five years, the life insurance and FOFA reforms have affected financial planning and wealth management valuations.

Many small practices and client books were sold in 2015 for between two and three times the annual recurring revenue. The lack of buyer interest in accrued default account clients (ADAs) resulted in "negligible value" placed on these client books, the report states.

"Buyers now take greater interest in the age-profile of the client base and how the revenue profile of the practice matched the age-profile," said Centurion Market Makers founder and chief executive, Chris Wrightson.

"This practice by buyers is driven by their interest to upsell or cross-sell other services and to identify additional revenue opportunities within a client base. There is no science to the way buyers are using this information to assess value; however, it is impacting the buyers' view of valuation."

Mr Wrightson added that further falls in practice valuations are likely over the next three to five years.

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"We predict [valuations to fall] by 10 to 15 per cent over the next five years," he said.

"This is particularly relevant for smaller or single-person operations where there is increased seller activity, as well as large practices where there are simply fewer buyers."

Nevertheless, financial planning firms in general tend to sell for more than similar-sized businesses in most other industries when measured by revenue or profit multiples, Mr Wrightson said. The calendar year 2015 also saw increased transaction activity for the buying and selling of advice firms compared with 2014.

"Based on the data in the 2016 report, even with lower valuations, it's likely financial planning businesses will continue to trade at a premium to many other small businesses and professional service firms," he said.

"That said, if the generous bank funding terms currently available of 10 years principal and interest were to be replaced with shorter repayment period terms, this would likely impact buyer capacity and current valuations."