Grandfathered revenue ‘absolutely at risk’

Comments from ASIC and others regarding the possible banning of grandfathered revenue is impacting advice practice valuations, according to Forte Asset Solutions.

Speaking to ifa on Wednesday, Forte Asset Solutions managing director Steve Prendeville said changes to grandfathering arrangements are inevitable, and that this will affect the valuations of practices.

Mr Prendeville pointed to ASIC deputy commissioner Peter Kell and counsel assisting Michael Hodge's comments made before the royal commission in its fifth round of public hearings, as well as pressure from other parties, including “industry participants, manufacturers, potential legislators” and the FPA.

“Grandfathered revenue was previously not segmented and so on average all revenue from financial planning was attracting say three times recurring revenue as a valuation methodology,” he said.

“I have already brought that in, I’ve reduced that to two times, which equates to two years you’d expect to see of that revenue stream, so immediately we’ve got a 30 per cent fall on valuations with regards to the grandfathered revenue.”

Mr Prendeville questioned the legitimacy of the reasoning put forward by various industry stakeholders for why such revenue should be banned, but added that such a ban remains a likelihood for business owners to consider.

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“The reality is that the debate here is whether this is conflicted revenue, whether grandfathered revenue isn’t on income streams that are being serviced, and that is a dramatically flawed concept,” he said.

“I expect though that irrespective of consumer outcomes, adviser business outcomes and particularly given the political environment we’ve seen last night and today, my expectation is that when the royal commission makes its recommendations … that the government will be in no position to say ‘no’, and particularly if it goes through to legislation and we’re in a Labor government, it’s unlikely we’ll see any practical remediation or common sense showing.

“It’s revenue that is absolutely at risk irrespective of validation, and therefore I’m already pricing in a decrease in valuation on it already.”

However, Mr Prendeville said while there will be “no maintenance of the status quo”, the changes within the industry will present opportunities for businesses that are adequately prepared.

“We’re seeing the break-up of the oligopoly as the backdrop to that, and I think as a result of that we’re going to see good businesses grow much like the US experience where we’ve got ‘super-boutiques’ being created,” he said.

“Good businesses can pivot quickly and move to change and are potentially already ahead of any legislative changes, and so good business will survive and actually flourish – it’s the middle of the road businesses who haven’t made the changes yet [that will be challenged].”

Grandfathered revenue ‘absolutely at risk’
Forte Asset Solutions, Steve Prendeville, ASIC, Peter Kell, Royal Commission, Michael Hodge, practice valuations
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