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.
I agree with most, however one thing you have very wrong in my opinion.
The total fee impact to clients will go up, not down. Tthe U.K experience with ongoing advice fees rose from an average of 50bps to 87 bps in the years since they banned all commissions. Upfront fees are also much higher than what we see here in comparison.
Coupled with the reduction in adviser numbers that everyone agrees with & we have a perfect storm of advice becoming unreachable for the masses. As education & regulatory costs go up, advisers have no choice but to increase what they charge for their services. With advice getting a greater economic moat around it, competition goes down. We will have a classic case of demand outstripping supply in the advice world. When you look at how many uni students are coming through with the right degree (not very many) you can foresee the problem lasting for some time.
The advisers that survive will do very, very well, the public will end up either paying more or being left to their own devices. There are plenty more examples of bad financial decisions by those unadvised than there are RC type failures.
Yet another semi-useless article that lumps risk advisers in with financial planners and makes no distinction. Business valuations for FP’s ‘may’ be reducing or may not. Valuations for risk businesses can only increase if anything. With NB commissions reducing a reliable grandfathers NON-super-insurance income is worth its weight in platinum. Why oh why do these people with a keyboard and an invitation to do an article here RARELY make the distinction between riskies and financial planners? So frustrating reading these lazy reviews that paint them all with the same brush. They are NOT the same, should have different qualifications and different metrics for valuing the different type of businesses with different client styles. I though Gavin was capable of better, given his RISK background. Methinks something afoot here . . . a reason undisclosed perhaps for writing this article?
Sorry to ask, but can you exactly explain why you think risk commissions aren’t in the firing line?
Yes, happy to explain – there has simply been no mention of it since the head of ASIC said risk commissions were NOT in the firing liner – recall that? It was after the RC started recently. Further, commissions will stay (look at the UK for why) but ‘may’ decrease a little more. If I was a betting man I’d say they won’t though. If regular (non-super ins) commissions ‘were’ in the firing line then the grandfathered renewals would increase in value – they would supply a reliable stream of income to buffer the effects of lower upfronts and/or hybrid/level. Simple really. Aside from the grandfathered commissions inside super that ARE at risk the normal risk commissions are not, neither are their renewals – Mr.ASIC says so! Best time in the world to buy a risk book! Simple logic but no doubt someone will disagree. This should be good . . .
“the head of ASIC said risk commissions were NOT in the firing line..” and you believe that?
I wouldn’t trust anything the head of ASIC says or said and in any event he has no control on risk commissions. Any government could come in tomorrow and cancel them. In fact if Labour get in that is more than likely what will happen. Very naïve Squeaky to believe that.
Did you see what happened in England when they cancelled risk commissions? They reinstated them quicksmart. The industry collapsed without them. Won’t happen here, ASIC or no ASIC influence.
The sooner people stop buying a book for the ‘reliable income’, the sooner the industry gets taken seriously. These are clients we are talking about, need to stop being prioritised on how much ‘low touch’ (aka fee for no service) passive income they can provided.
Buying a book isn’t about reliable income (well not for me anyway) Buying a book is necessary to increase “quickly” the ongoing income to cope with the additional and constantly rising cost of compliance, and consequent staffing levels required to administer it all
So if I buy a book now then I’m a wood duck? I guess I’ll wait until valuations get smashed before deciding to buy. Thanks for the heads up.
I suspect not a wood duck, for businesses who are looking to work longer term with their clients, this is over 5-10 years i suspect now is a great time to buy a business. In the short to mid term, valuations will go down as the market settles and more people exit but if you build a strong sustainable model that attracts great clients who are prepared to pay your fees then you will be in a strong position long term.
Buy your risk book by all means – best investment you could possibly make – think about it. One proviso – do your due diligence like a trojan, make sure the client base is quality. Do this right and it is, by a clear margin, literally the best investment in the world.
Despite the comments about the Royal Commission and the future of planning Business’s, the biggest opportunity is to get out there and attract new clients. The need in the community hasn’t changed and many people require good quality advice. What we must have as Advisers is a well structured referral process and system
Hi David, I think you are dead right here. In every phase of business there is opportunity, how we embrace this opportunity with a sustainable business model for clients who want to engage with us and importantly will see us succeed in this period of unprecedented change and disruption.
yes true and correct. but how do you suppose a young adviser who has the pre-requisite qualification is going to be able to do this? they have no cash, they leveraged into a property at the peak and are in a negative equity position
there will be very few actually who will be able to do it probably the middle group around 40 to 45 who have a degree in financial planning already, have sufficient equity and income to be able to borrow
finally Australians are heavily leveraged to the property market and we all know how that is going to end within 12 months right ?
They do it the proper way and actually grow a book organically thought providing quality service and attracting referrals… Not just buying a book of grandfathered crap.
true, you don’t need to pay for a book you will get the clients for freeee
I would like to not agree with the above but it’s reality… for now anyway . The industry is going to take some time to recover. I’ve completed my education which the bank I work for did not reimburse – what a surprise! I would love to take a break from the industry but I’m limited as I am seen as a dodgy bank creep! I love my clients and work hard but I’ve been tarnished and placed in the same bucket as the unethical jerks. Until then I’ll keep refreshing seek.com and maybe an employer will take pity on my institutionalised resume!
[quote=Anonymous]Sounds like an article written in VHS & Beta Cassette weekly magazine. Beware the pending doom of the invention of CD’s, your video store might be worthless. This pending storm (higher education, commissions removal/ exit of banks) has been telegraphed for 10 years. Seems like some advisers need to check the fax machine as they’ve missed the message. A really sad case if you’ve had your head in the sand all that period. [/quote]
Financial advice is morphing into something that will be smarter, leaner, nimble and responsive to client needs. The hit to business valuations will be a temporary one, followed by more sustainable growth. So yes, if you’re close to retirement you should probably sell – but everyone else needs to calm down, take a deep breath, re-tool, and embrace the future with renewed energy and confidence. To hell with the doubters, I’m in this for the long run.
The other part of the storm is reduced upfront life insurance revenue, additional practice compliance costs through ever increasing regulation and hnce squeezing profits and hence revenues.
Honestly, I think if the grandfathered commissions were given an end date, say four years into the future, then a lot of the current noise of reduced valuations would die down. If that time frame is not enough for a practice to speak with and convert an equivalent income stream to Fee for Service, then ultimately the business model was too rigid and something else would have broken it anyway. Also, those business that have a model that can thrive on converting grandfathered into fee for service can work forward acquiring clients with no fear of the future.
Sounds like an article written in VHS & Beta Cassette weekly magazine. Beware the pending doom of the invention of CD’s, your video store might be worthless. This pending storm (higher education, commissions removal/ exit of banks) has been telegraphed for 10 years. Seems like some advisers need to check the fax machine as they’ve missed the message. A really sad case if you’ve had your head in the sand all that period.
Commissions on investments were removed so long ago I can’t recall and we have had education standards and a PD program for even longer. The challenge is not having ones head in the sand but hysterical comments like yours which attribute the behaviour of the banks ( 2000 – 2018 RIP ) to the whole industry.
Hysterical, No way. Sorry my PI cover just went up 30% to 50% because of the Banks so I can be hysterical. John, pretty much the Banks have held back Financial Planning from being a profession. It’s 2018 & so let’s look at the environment. We’ve got 1) a Royal Commission into Banks, 2) FASEA,Pretty much FASEA is CBA’s excuse and get out of gaol card with ASIC. 3) Financial Planning advice is still not tax deductible, in the words of a client…..WTF? 4) A Financial Planner standing in the community is so low they can’t witness certain documents even. You say RIP… I say good riddance to the Banks and as soon as product is separate from advice the better we’ll all be. I’m sorry but, as my PI Insurance goes up 30% to 50% due to the RC and my ASIC fees go up and clients are paying for that…. I find the Banks GUILTY of holding back the Financial Planning industry from being a profession. Could be a good opinion piece for IFA/ Aleks to write about and let readers debate about.
Try acting like a professional when you post these comments. You should be ashamed of yourself.
I like MOST of my colleagues who have been in the business providing quality, real and valueable advice have had enough of this ridiculous industry and the leeches like the FPA who use it as a political football or excuse to zap you of fees and memberships.
Anyone who can still find a buyer should sell sell sell with a matter of URGENCY.
You are kidding yourselves if you think this business or industry is a valid and sustainable BUSINESS model let alone career.
Seriously. Think about it.
You enter a franchise expo and they lay out to you the cost and litigation risk. The education requirement and compliance issues with nothing but truthful facts.
You would turn around and walk out laughing at anyone even considering this as a business.
Now, factor in opt out, best interest and online advice and your facing a monumental Shite storm just trying to do business let alone be compliant while doing it.
Get real people. Abandon ship while it’s still floating.
Your business is already near worthless without complex opt out clauses and refunds in the first couple of years.
Run don’t walk…..RUN and sell it to the next wooduck in denial.
It sounds like we might operate in different industries, I run a strategic focussed wealth management business where my clients pay me for my advice. That arrangement can’t be touched by ASIC, RC or any other headwind. I enjoy a mid 6 figure salary and love my work, my clients and my business. If you want out quickly, I’m happy to pay you 1x with zero retention, I’ll take it from here.
I love your posts Steven – they provide me with my daily chuckle which is very important in the current climate. Whilst I agree that there are many issues facing advice businesses – you alluded to the education requirements, but also LIF, robo-advice and who knows what other regs will be handed down following the RC. I totally DISAGREE that the advice industry is about to sink – yes valuations will most probably decrease but IMO – FP businesses with a well thought out CVP, highly educated and engaged F4S clients will THRIVE. Throw in intelligent use of fin-tech and BOOM – name your multiple cos a successfully run business will be a valuable acquisition regardless of the industry in which it operates. I can’t wait for your next post Steven – please make it worthwhile.
Steven, you poor unfortunate creature. You are misguided on so many points I admit defeat trying to even begin to correct your many misconceptions. It would be way above my paygrade to attempt it. I’ll just wish you the very best, hand on heart, and hope you find happiness and much satisfaction in your later-life calling. All the best.
The perfect storm will occur when we have the next inevitable correction in markets. Those institutions that have been promising outperformance ( by increasing the growth assets in their balanced funds) and questioning the value of advice will be the most vulnerable.
Never a truer word spoken…. Aus super “best performing Balanced fund” for 2017-18 fy yet has 83% in growth assets…. Last time I looked that wasn’t a balanced fund.
HostPlus Balanced Fund is 90% growth when you add back property and infrastructure from defensive to growth where it should be. Guess who was the number one ‘balanced fund’ ?
There is a lot of truth in what you’re saying but many people have their heads in the sand..
I don’t agree with you Gavin but what your saying is definitely what some people are trying to do to our industry ——SAD
Who’s sad? You? Gavin? or Steven? Please explain Pauline???? :-))