In its 2020 Financial Planning Practice Sale and Valuation Guide, released this week, business broking group Centurion Market Makers revealed there had been “a severe reduction in the profitability of clients at the lower end of the revenue range” over the course of the last 12 months, primarily due to the removal of grandfathered revenue.
“Our work indicates that it is very difficult to be profitable with a client with a fee under $3,000,” Centurion said.
“Clients below this level generally detract from value and have fallen to one to two times [recurring revenue] if they can be sold at all.”
The dramatic decline in valuations when it came to low-value clients was also affecting a practice’s overall valuation, as increasingly discerning buyers viewed such clients as high risk, the group said.
“The effect of averaging is the key driver of reduced valuation,” Centurion said.
“What this means is that the relative amount of “high risk” revenue i.e. clients with fees less than $3,000 are less attractive to buyers as the level of work required significantly reduces profitability.”
The group said as credit became increasingly tough to access for “bolt-on transactions” – smaller-scale purchases of client books that could slot into an existing business – buyers were taking less chances with client revenue that may not be secure or generate significant profit.
“The royal commission has resulted in reduced access to credit for all small businesses as the banks rework their credit assessment and focus on cash flow and ability to repay. Small financial planning practices have been caught in these outcomes and as such access to credit for bolt-on transactions has reduced,” Centurion said.
“Our experience has been that purchasers who are interested in small books have been unable to raise cash flow lending finance and have had to provide ‘bricks and mortar’ security for the lending. This has further exacerbated the lack of demand for small books.
“Purchasers are looking for higher rewards from acquisitions and will ‘cherry pick’ the best ones.”
As a result, the group advised practice principals thinking of selling their business in the coming months to look at “cleansing the client base of unprofitable clients”, as well as ensuring remaining clients had a demonstrable profit margin above the cost to serve.
There we have it ladies and gentlemen ! United we stand divided we fall………
So the first article states advice needs to be $300 and the second article states clients paying less then $3009 are t viable. This industry is in a mess!
I’d hate to see what the position would be if the government and ASIC hadn’t had numerous inquiries and royal commissions which focused on reducing the cost of providing advice to the general mum and dad clients. For those that haven’t worked it out this is being written in the sarcastic font.
In all seriousness, if anyone wants to sell a book of clients averaging 3k a year in Ongoing advice fees, I’m all ears
Consider also that if you buy a huge book of low value fee paying clients it obligates you to provide a review which includes the provision of an advice document on at least an annual basis (ASIC INFO232) and you have the FDS and opt-in requirements. If you can’t review them all, or bring them up to a commercially sustainable level of fees, you need to turn the fees off and refund (with interest) for the services you haven’t provided (in which case the purchase just becomes a liability rather than an asset), or at the very least an expensive list of prospects.
INFO232 says you only need to provide an annual review if that’s what the client signed up to in their service agreement. If they signed up to a lesser service (which is quite possible if the fees are low) then there is no requirement to provide an annual review.
At the end of the day it is about delivering what was promised. The key is understanding what was in the service agreement for each client. If the service agreement specifies two reviews per year and the client file only shows evidence of one, that’s potentially just as big a problem.
This is partly why so many insto licensees are paying “fee for no service” refunds when the client did actually receive the service they were promised. It’s quicker and easier for instos to pay the refund than it is to take the time independently verifying exactly what was promised versus what was delivered.
The real issue isn’t value here, but the cost to serve. The RC hasn’t improved things for customers, nor has LIF. Getting rid of commissions and forcing down revenues while forcing up costs has never (in any kind of business) been a recipe for success
I started my online-only financial advice business in order to provide afffordable, accessible financial advice to those with not-to-complex needs.
It’s been difficult attracting prospects online, especially as i started not long after the Royal Commission when trust in advisers (in-person let alone online) was at an all-time low.
I would love to hear from anyone looking to trim their sub-$3000 per year clients. I believe I could remain profitable while servicing clients with fees/revenue above $1500 pa.
What a joke !!!!!! Clients that may be worth little now are quite often worth a lot down the track!
Only if you don’t go broke in the short term
100 clients at $3,000 a pop that’s $300,000 of revenue and say $120,000 in expenses, wages, levies and you’re left with $180,000 maybe $150,000 take home cha ching. I’d be happy to buy that for say $650K-$700K. I may not be driving a BMW but not bad cheese. Of course if I’m buying some crappy AMP like business ( i mean book) with 1,000 clients ( i mean a register) that I can only really service 100, and the other 900 are paying me $3,000 or $300 than yes that’s a big risk.
Wow, thats really cheap expenses, do You work alone and from your garage?
Wasn’t the whole idea of this review to make advice more accessible and affordable for clients???
Or was it to open the doors to super funds and Intra Fund Advice.
I think most of know the answer.
Last one out please turn the lights off.
Would it be an ethical issue to just simply drop clients due to commercial reality? ASIC has came out saying that they do not care about the profitability of advice businesses
The money is in managed accounts, SMAs etc. That is where the “wise guys” are moving to now – not “Advice”.
So if you’re an individual seeking financial advice unless you’re prepared to spend $3,000 per year in advice fees you are left ou in the cold. I dare say this prices out 90% of the population from advice. Great work FASEA, Kenneth Hayne & ASIC!
There are an enormous number of low value clients. To start a business servicing them efficiently requires innovative technology. The old business models for traditional client service are not viable.
Yep, the “roboadvice” model is certainly more cost effective, because roboadvice has regulatory immunity. Similarly with accountants, mortgage brokers, real estate agents and union super sales reps. If you take away all the regulatory costs its amazing how much cheaper financial advice can become.
Very interesting. I am not selling my practice however my cut-off is $2,400 pa. Not profitable otherwise. Most guys I speak to have a cut-off figure of $4,000 pa.
It looks as if it is getting harder and harder for the mid-market to get financial advice. Centurion is right – it is very expensive to service small clients as much of the compliance burden is suffocating and doesn’t add any value for the client.
Is everybody trying to retreat to the bigger clients? With fewer advisers that even seems feasible.
It’s difficult to provide a FOFA and FASEA Code of Ethics 20 step advice process for less than $3,000 a year.
Yes agree 100%. but people like you really disgust me, because you’re complaining about Government intervention yet you’re a contributor to that. I would claim a lack of representation, a lack of a professional body and a body clearly conflicted has lead to Government intervention. Clearly demonstrated by the FPA putting the needs of CFP’s first. That’s Commonwealth Financial Planning. I have a low opinion of FPA members like yourself, that continue to support this lack of representation. Julie CFP. just go away and run back to your discounted membership program paid for by your Royal Commission “partners”.
Are you a bit hangry Tom? Have you bought that Snicker’s chocolate bar yet? I think you had a rant in another article and it was suggested that you were not yourself when you were hungry! You might be right in what you say, but your aggression in your delivery turns people off!
That’s a bit harsh Tom. I don’t recall ever seeing a “Tom” on the Board election candidates? Just keep shooting from the galley Tom – that’s a brave and constructive approach.
The bloodbath continues