The financial advice opportunities in an ageing client base

Matt Walsh explains why maximising the opportunities offered by an ageing client base can add value to your financial planning business.

A financial planning business with a retired and ageing client base is not necessarily a declining business — as long as the owners recognise the potential to add value.

The traditional view is that purchasing a business with a diminishing asset base is not a sensible move, unless the sale price of the business is heavily discounted.

Unfortunately, this means that the principals won’t get the value they had hoped for — or had counted on in their own retirement plans — when they sell their practice.

But if the business has a long-standing loyal client base and has continued to develop a range of services that suit these clients’ changing circumstances, there is long-term value in the business that can be turned into real growth. This should be recognised by a purchaser and reflected in the sale price.

The Lifeplan ICFS Financial Advice Satisfaction Index shows that the longer a client is with an adviser, the greater the level of trust.

Clients with a high level of trust are more likely to act as a referral source for the business, and they will be more receptive to new services and approaches.

This creates an opportunity that is not always fully explored by advisers or taken into account when a practice is valued.

The standard valuation models for financial planning businesses assume that the older the client base, the greater the risk of revenue falling and the lower the value of the business.

These models commonly use a multiple of annual recurring revenue of between 1.5 and three times, with the age of the client base being one of the key factors that influence the multiple.

That is, the older the average age of the client base, the higher the risk of the recurring revenue decreasing and the lower the multiple.

However, research undertaken on behalf of Lifeplan Funds Management shows that services involving intergenerational wealth transfer can assist in reducing, if not eliminating, this risk.

Such services have the capacity to increase the sale value of a practice by up to 30 percent.

To protect and enhance the value of a practice, principals need to retain funds under advice (FUA) as well as provide certainty about the future of FUA from an ageing client base.

This can be achieved by developing services in the interests of clients and their families that help ensure the funds stay with the adviser even after the death of a client.

Such an approach reduces FUA leakage for the business, and gives the adviser the opportunity, and a good reason, to develop a relationship with the client’s beneficiaries.

If such relationships are developed, existing FUA will be retained by the business and the client base will be augmented with younger generations.

Most advisers meet with clients’ spouses or partners as a matter of course, but it is far less common to involve children — either dependent or non-dependent — in these discussions.

Having such relationships can help a planner to manage the financial support the client’s family may require during the difficult days after a loved one’s death.

There are a number of services in the area of estate planning — Will development, investment plans for grandchildren, and testamentary trusts — that can help with this.

Statistics from the Goldman Sachs JBWere report Philanthropy Focus: A New Era for Family Philanthropy in Australia in the Australian Journal of Political Science show that there will be an estimated $600 billion transferred from one generation to the next over the coming decade, and that each estate in Australia has, on average, 2.7 beneficiaries.

This clearly indicates that there is an opportunity for practices with an older client base to grow by offering services designed to help the next generation.

Practices that are able to retain FUA by developing a relationship with their client’s beneficiaries are not only improving the value of their business — they are also providing a helpful service.

Matt Walsh is head of Lifeplan Funds Management, a specialist business of Australian Unity Investments.