The Centurion Market Makers’ 2024 Advice Practice Acquisition, Sale, and Valuation Guide delved into the impact the 2019 royal commission and Quality of Advice Review (QAR) have had on the profitability and market value of advice firms.
According to the report, the ongoing regulatory changes within financial services has impacted the ability to operate a profitable advice firm.
“The royal commission resulted in the removal of all grandfathered revenue in 2021 and the impact was a significant amount of revenue was removed from the advice sector and this has impacted some businesses far more than others,” the report said.
The ability to service clients on the lower end of the fee spectrum has also been impacted as cost of provision of service has increased due to regulatory changes, Centurion said, decreasing the value of the business and negatively impacting them when selling.
“There has been a severe reduction in the profitability of clients at the lower end of the fee range. Practice owners generally believe it is very difficult to profitably service a client with a fee under $3,000 per annum,” Centurion said.
The report said that prior to selling, business owners should be “repricing the low fee-paying clients that wish to remain a client and removing unprofitable clients if they are never likely to become a profitable client”, to increase the value of the business.
According to Centurion, advice firms may also struggle to grow their businesses as this has become more challenging financially in recent years due to decreased profits.
“The point of scale for any practice has materially increased. This means that the revenue point where a practice starts to get the benefits of scale has increased,” Centurion said.
As the industry adjusts to the changes of the last five years, the report said it will adjust to the new standards and could even flourish as the QAR reforms begin to take effect.
“Having now come through the other side of the royal commission, we expect business values to normalise as business owners settle into the ‘new normal’,” Centurion said.
“The Quality of Advice Review includes recommendations that would make the running of advice businesses generally more efficient, and this may lead to improved profit margins impacting valuation.”
Centurion maintained that selling within the industry will still continue to be profitable, however, this could be negatively impacted if industry habits shift.
“It could be expected that financial advice businesses will continue to trade at a premium to many other small businesses and other professional service firms of the same scale,” it said.
“That said, while the industry has usually had favourable financing terms, including 10-year principal and interest loans, if this does not continue, we may see an associated decrease in valuations in line with shorter loan period amortisation payback periods.”
