The perfect storm in the advice profession
The royal commission into banking and financial services misconduct may be the last nail in the coffin for many mature advice firms who are facing a perfect storm in financial advice.
In turn, many mature practice principals may be forced to accept a far lower sale price as business evaluations drop.
We are well aware of what has been uncovered throughout the public hearings in the royal commission where a small number of advisers and institutions have failed their clients.
Beyond what will inevitably be the largest and most significant review of our advice profession since the introduction of FSRA in 2004 we are now in the “perfect storm” in financial advice.
Many advisers are experiencing the effects of the perfect storm already, but most people are not clear on how far reaching this storm will be for their firm’s future and how this will impact their own exit plan.
What is the storm throwing at us? We are being impacted by a combination of the life insurance reform, professional standards through FASEA, plus assets linked fees coupled with fee for no service; as well as a possible change in government and of course the royal commission.
This time, seeing out this storm may not be an option.
It may be time for mature advisers to look for an exit as they admit that they are not up for this unprecedented change and the challenges it presents.
For some, the timing just works. Finding a buyer who has the determination or existing business model that has or can adapt to the change set out already would seem the logical answer.
If you are ready to move now you will be still in a good position to command a good price for your business.
But what if you, like many, don’t want to exit just yet, you still have a few good years you wish to dedicate to your clients. What does your path look like?
Here is where my concern becomes real when we look at the secondary or hidden effect of this perfect storm.
In two to three years we will begin to see more and more practices signal for exit. Supply and demand will now come into full effect and drive down multiples on business evaluations.
For the few large firms with enough capital there is going to be a lot of opportunity to buy mature businesses, but who is going to be funding these purchases?
Vertical integration is almost dead. The clear conflict of interest between manufacturers owning distribution channels and then creating an environment that ensures its advice recommendations favour in house products has been publicly torn apart by the royal commission.
With banks no longer interested in owning distribution it is clear they will no longer have much of an appetite to acquire the sale of advice channels.
For many who have longstanding relationships with manufacturers that perhaps may have been part of the long term goal of a buyout, where do these people stand in light of these changes?
Many firms over the years have been acquiring businesses, growing in size, creating critical mass to become more appealing to an institutional buyer; quite often co-funded by the potential institutional buyer. Now, there is a focus on unwinding any future acquisitions or any ownership.
Business owners will be required to seek other funding options putting more pressure on business valuations.
This model means largely young advisers who are considering succession from within the firm will be less likely to as the capital needed to take a meaningful stake in a firm is unreachable.
Will this mean in the future firms will be smaller and more nimble in their dealings with clients to ensure they do have a strategic exit in mind? Yes.
Perhaps business engines that enable like-minded practices to share back office services will be the future?
With more business owners selling in the coming years there will be a lack of new buyers or businesses looking to offer up capital in a heavily regulated profession; succession concerns are greater than ever.
Mature practices will feel the biggest impact, they are set to suffer greatly as values plummet when they are forced to sell.
My advice is to start thinking now about how you expect to exit your business, exit strategies will look completely different in the future.
One thing now is for certain, the royal commission is forcing practices to think deeper about disclosures and the way they share both what is selected in a strategy and what is not.
Fees will be heavily scrutinised with an emphasis on what is and is not delivered as part of an ongoing service proposition.
What a client is and isn’t told in your advice documents will be reviewed to ensure clients have a complete picture around their strategy and product selection; lastly expect the total fee impact to clients to decrease as grey and hazy rebate model revenue makes its way back directly to the client.
Change fatigue has been bantered around for many years, now and with a recent survey talking of 80 per cent of advisers not likely to meet proposed educational hurdles it is likely for a lot of these advisers that perfect storm has already hit - they just don’t know it yet.
Gavin Glozier is the group general manager of advice practice Noall & Co.
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