Warning for advisers selling up before exam deadline

Financial planning firms with clients with fees above $3,000 are the most attractive buying target currently but advisers need to be prepared if they expect to exit before the exam deadline.

In a report from Centurion Market Makers, it said 2021 had continued to be dominated by COVID-19 and the changes arising from the Hayne Royal Commission. It was also the first year without grandfathered commissions which dropped off at the end of 2020.

Buyers of practices were becoming “more discerning” and “stratifying client bases”, it said.

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“Buyers are acting in a very sophisticated manner and stratifying client bases when developing offers such that they will only pay high multiples for high value clients. This means the average for the book can drop, but high-quality clients are still demanding around a 3x recurring revenue multiple.

“The effect of averaging is the key driver of reduced valuation. What this means is that the relative amount of “low margin” revenue i.e. clients with fees less than $3,000 are less attractive to buyers as the level of work required significantly reduces profitability.”

Prices for clients with a fee structure above $3,000 had held steady and were the most attractive client style, particularly if they had the appropriate fee disclosure statements, opt-in and comprehensive compliance regime.

“These fees, with appropriate FDS and/or Opt-in are the most attractive client style, and we could sell dozens of these books a year. We expect this style of client book to hold value over time.”

The firm also cautioned single-owner advisers who were seeking to leave the industry before the exam deadline, warning they could end up receiving a lower sum due to the rush. Advisers had until 1 October, 2022 to pass the Financial Adviser Standards and Ethics Authority (FASEA) exam.

“Education standards and the FASEA exam deadline during the year will see an increase in advisers exiting and we expect some will be single-owner businesses that will seek to sell. We expect enquiries in this respect to pick back up closer to the cut-off date for non-university qualified advisers.

“We caution advisers in this position that a rush of books onto the market at a time where there will be far fewer buyers will attract lower prices and leave some advisers without a solution. A planned process to exit the industry is always preferable, and leaves advisers with more options than a rushed exit.”

Source: Centurion Market Makers, as of June 2021

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Interesting that fees above $3,000 pa are perceived to have higher "margin". Are fees above $3,000 pa more reflective of extra gouging than extra service?

The advisers I talk too who have higher fees than my average all tell me the clients are more demanding and they spend more time on the them as they have higher expectations.

It should all be based on your cost to deliver the service as compared to fees. I am comfortable that my fees are a little lower than average but so are my costs and the complexity of the advice I provide which means that I have lower risk and am still profitable

You missed the point. Fees below $3,000 are below the cost of doing business and will therefore drag down the value of a business. The only reason anyone would pay anything for sub-$3K clients, is based on the premise that the purchaser will have an opportunity to engage with the client and potentially increase the fees to a sustainable level.

Surely the cost of doing business is primarily based on the scope and service level for the client. As an extreme example, a client who pays $1,000 pa and require 3 hours work is likely to be higher margin than a client who pays $5,000 pa and requires 30 hours work. Sure, there are fixed, non labour, costs that need to be apportioned as well. But unless the business has extravagant offices or lots of management overhead, these shouldn't have significant impact on margin per client.

It all comes down to who or what your compliance team says or doesn't say. 3 hours for some licensees would cover the preparation of the review pack preparation, let alone the meeting, post review roa and/or further advice and the file notes and implementation process. Some smaller afsl may not care as much re risk and don't require as strong an evidence trail. Some afsl are not even sure what the law is or the evidence trail should be and don't do enough audits etc etc

I think you may find most smaller AFSLs are far more aware of the actual law than most licensee compliance bureaucrats, who generally don't understand either the law or the business. They understand rigid, complex, processes and cling to them like a security blanket.

To be fair to the licensees, they are (a) having to accomodate the lowest common denominator and (b) usually trying to justify the consistent recommendation of in house products. It couldn't be easy trying to do both compliantly.

Exactly right B. Which is why self licensed planners can achieve full legal compliance with much less complexity, bureaucracy, and cost.

Perhaps this is why large acquirers prefer clients paying over $3K pa? They only want clients who are already used to paying excessive fees for inefficient processes and bloated overhead.

Who says its below the cost of doing business. Personally if you can't deliver ongoing advice profitably at a $3k price point your business is broken

spot on.

Billy bob is spot on when he said "Who says its below the cost of doing business. Personally if you can't deliver ongoing advice profitably at a $3k price point your business is broken".... I need to charge more because my $200,000 Audi doesn't run itself, and my salary at $300,000 a year won't be met. Many businesses are making good money charging $2,000.

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