What should advisers consider before embarking on M&A?

pricing netwealth M&A Peloton Partners financial advice

22 April 2024
| By Laura Dew |
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It can be extremely hard to realise the gains from financial advice M&A, according to Peloton Partners’ Rob Jones, and more could be gained from firms looking inward at their own practice.

In a webinar with Netwealth, co-founder and owner of financial services consultancy Peloton Partners, Jones discussed how businesses can keep up with rising costs and improve their business models.

Prior to setting up Peloton Partners, Jones worked as the head of acquisitions at licensee Shadforth Financial Group.

Commenting on the trend and success rate of acquisitions in the financial advice space, he said they are too often poorly conducted and expectations failed to be achieved.

“Too often acquisitions are done poorly in this country, the expectations are unrealised, the cost is high, integration is elongated and therefore it hasn’t gone particularly well for the firm that is an acquirer.” 

Referencing specific cases he had worked on, he said more could have been gained by the firm in question looking at its own internal processes than seeking out an external firm.

He said: “We have come across firms who come to us to say they are about to do an acquisition and tuck in $400,000 in recurring revenue in a combination mostly of financial planning and risk insurance fees. They are about to pay 2.5x for that $400,000 in recurring revenue.

“There were about 100 clients related to them, about to drop $1 million to buy 100 clients they don’t know and $400,000 in recurring revenue that they hope they have validated and verified properly. 

“However, in that practice, they had just under $500,000 in revenue available to them from their own clients who they do know, with no additional costs associated with acquiring them other than a consulting fee or some time costs to achieve a better outcome.

“So they should look inward rather than outward when it comes to revenue acquisition.”

Among the internal suggestions for a firm to change is its pricing model and framework, including ensuring it is fully aligned with client complexity or client value and a proper assessment is done of fees. Too often, Jones said, legacy fee arrangements are kept in place for clients because the firm is fearful of losing them as clients if they are changed which can cause confusion between earlier and newer clients.

At more mature firms, pricing policies may already be in place, but adviser policy discretion when new staff join can impact profit margin.

“If you are running a financial advice firm, let’s say you have a fixed or a hybrid or a percentage-based fee, and you decide to apply a basic CPI increase fee to your revenue each year. If you did that, then you would be falling behind because the costs [of running a practice] are well and truly beyond the basic CPI increase.

“It’s a fairly significant and material warning sign that this industry isn’t static, your expenses are never static, and we must apply an adaptive pricing methodology that can move and deal with these changes that impact your bottom line.

“If you are standing still and you reprice every five or six years instead of every two years, you are going to miss out on considerable profit that you can and should be entitled to as someone running a financial planning business.”

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