Question mark over future pricing of planning practices
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Structural reform regarding commission payments in the financial planning industry is creating uncertainty around the future sale prices of planning practices.
Financial planning businesses have traditionally been valued on a multiple of annual recurring revenue, including trail commissions on investments, which clients have historically been unable to ‘turn off’.
But under recommendations being made by the Financial Planning Association (FPA) and the Investment and Financial Services Association (IFSA), clients will be able to ‘turn off’ trail commissions on investments made after 2012 if they feel they are not receiving value from their adviser.
Chris Wrightson of Centurion Market Makers said there are various views on the impact the removal of guaranteed trail commissions will have on the potential purchase price of financial planning businesses.
One view is that “given the valuation reliance on annual recurrent revenue, eliminating trail commissions could reduce the value of practices and of client books”, Wrightson said.
An alternative view is that books of business with ongoing trail commissions attached (ie, those that are ‘grandfathered’ under the FPA and IFSA recommendations) will in fact become “a valuable legacy”.
“Over time the diminishing supply of these books could potentially increase their value,” he said.
Wrightson said financial planning practices have historically attracted “quite high valuations compared to small businesses in other industries”. These valuations have been supported by projected superannuation growth rates, the certainty of income provided by trail commissions, as well as the valuations set in ‘buyer of last resort’ facilities by institutions.
Wrightson said many financial planning practices are already separating advice and investment management fees. He believes doing so is one way for planners to have “greater ownership of the advice fee” and deliver certainty to the annual income of their practice.
He believes redefining a practice’s advice offer can also lead to increased revenue.
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