Most people work for an income, that is their only remuneration. They get paid once for exchanging the hours of their life, or receive a salary or wages. The wealth they accumulate is from savings (personal or superannuation) and from the investment of those savings from income. Any extras come from salary packaging or profit share.
This situation applies to many advisers, as well as those who are merely in a job even if they are supposedly self-employed. These advisers can be easily identified by asking a simple question: Who owns the rights to the assets under management, the continuing fees or trails?
Some people get to build a capital value from being self-employed. They not only work for income but as well they beaver away over time setting processes, employing staff, building relationships, investing both money and sweat in equity to create a saleable asset.
The value of that asset varies because of the quality of the asset built and the supply and demand from the market. Many advisers will find their businesses are limited in value because of the style of the client base, the lack of supporting systems in the office and client processes, and the quality of staff. Too many advisers have been reluctant to make the strides to employ quality staff. For many, this remains a cottage industry. And while planning practices which have good value have been built this way, planners must ask themselves this next important question: Can you afford to take a six-month holiday?
For many advisers, their best clients are logged into their sub-conscious. They automatically maintain a strong client relationship. But who will be willing to pay top price for a business that consists of paper files and personal relationships without a considered takeover strategy.
This is difficult to do if health changes quickly. If, as an adviser, you get anxious because you are away from the office for three days, how could you afford to take weeks and months off? Think this through, you don’t have a business, you have a job. The solution is to corporatise your business.
Archimedes said: “Give me a lever long enough and I will move the world.” This same principal of leverage is a way for a business person, such as professional advisers, to be paid the third time for their life’s work.
While the individual business is saleable, the value may be limited. However, a distribution of many smaller businesses can be linked together to offer product manufacturers a stable platform for product delivery. Then that distribution business is also valuable and may become marketable to institutions desperate to maintain or build market share or market penetration.
Of course, adding another business layer may add a greater risk to a successful outcome. The core values of all the parties must be in accord and the distribution business must be built on providing a competitive range of services.
If the product manufacturer already owns the distribution channel, no value attaches to the distribution. When looking through theMoney ManagementTop 100 Dealers announced in October, some interesting facts arise. Of the Top 20 Dealers, only three have any degree of independent ownership (13 are owned by banks, four by financial institutions), yet of the top 100 dealers, 37 have a degree of independent ownership (four have a relationship with union or industry super, an interesting development). So most advisers have already limited themselves from any chance of building an equity value from their own distribution efforts.
When you look at the prices that dealer distribution is fetching for all or part from large institutions (?????), now valuing quality, sizeable distribution is valued in the hundreds of millions and it is easy to begin to appreciate the value and importance of focused advisers in the equation.
In our business, even the best product in the world (how many get that rating) still needs to be sold. Individual distribution is worthy but has no economies of scale. In my opinion, in time, the value of the distribution connection may be as valuable as the adviser’s individual business. But the model will insist on a loyalty quotient. In the past, the proceeds of the sale have gone to the business people running the show, not the advisers. The result is the advisers leave after the sale and only the shell of the purchased value is left.
As such, many groups have begun to adopt the concept of vertical integration within a business model. This is not new but allows for the development of layers of profitability using the same distribution system. This is created by using preferred products or specialised products built for the distribution system such as master trusts and wrap accounts.
When the distribution owns these layers and they are successful, it creates extraordinary value to the distributor. This is likely to be the future profitability for distribution. Ask yourself just how many choices of master trust does your dealer approve. If it is only one, that is where the business focus and the wealth is being created. Do you, as a distributor, own a part of it?
Some dealers owned by institutions will have a range of arguments as to why being with an institution is a smart way to go. Who knows, they may be right, but that is not for me to argue. My view is that to link in with the power of distribution is to build additional wealth to the distributor.
So some advisers will spend their careers working for income and have to build wealth from that income. Some will spend their lives not only generating income but also building businesses that will have a capital value, which, if managed correctly, will add impressive numbers to their super. A few others will opt for a link with independently owned dealers where they can also have a third value, a value that relates to their value as part of that distribution. Who will be the winners? Time will tell.
Robb Musgrave is an authorised representative of Mawson Securities Pty Ltd.
