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.
“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
AUTHOR
Laura Dew
Recommended for you
The new financial year has got off to a strong start in adviser gains, helped by new entrants, after heavy losses sustained in June.
Michael McCorry, chief investment officer at BlackRock Australia, has detailed how investors are reconsidering their 60/40 portfolios as macro uncertainty highlight the benefits of liquid alternatives.
Having reset its market focus to high-net-worth advisers, Praemium’s administration solution has been selected by Bell Potter in a deal that increases the platform's funds under administration by $6 billion.
High transition rates from financial advisers have helped Netwealth’s funds under administration rise by $3.7 billion in the fourth quarter of FY25.
