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Larger FP businesses sell on an equation of normalised Earning Before Interest and Tax (EBIT). As an example, an FP business with annual total revenue of $1.5M may have a 33% profit margin, or $500K. This profit, or EBIT when adjusted, can be multiplied by between four to six times, once again depending on the quality of the business. Pre-GFC, recurring revenue multiples would have reached 3.5x to 4x and EBIT multiples touched the high 8s – but now that’s all changed. 

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 Free Workshops

Radar will be running another national roadshow of workshops in March 2012, titled ‘Helping Planners Leave the FP Industry’. For planners who are seeking to exit the industry, it’s important to be informed about the current market regarding financial planning practices sales, what’s involved in selling and how to find the right buyer for your business. The workshop will also suit if you are restructuring your business which may result in selling part of your client base. 

To register your interest in attending please email Michele Conroy with your contact details and city. Email michele@radarresults.com.au.

Planning practices looking to expand are finding it increasingly difficult to source funding, as banks tighten their lending criteria amid economic and regulatory uncertainty.

Before the global financial crisis (GFC), Capital Advantage director Matt Taylor – who specialises in cash flow lending to planners – worked on the assumption that if a practice carrying no debt wanted to acquire a business of the same size, it should have no trouble obtaining a 100 per cent loan.

“Now I’ve changed that ratio,” Taylor said. “The business now needs to be twice as big as the other business and carry no debt to feel confident that the bank will support the application.”

On the lower end of the scale, he said, banks were looking to have physical property rolled into the structure of the loan as security. However, funding was still being made available to larger practices because they were seen as less of a risk, Taylor said.

A spokesperson for Westpac denied the bank had altered its lending criteria since the GFC, although he did add that Westpac’s target market was primarily experienced planners who were aligned to larger and more stable dealer groups.

National Australia Bank director of financial planner banking, Shane Kirsch, said his bank had not changed its approach to lending since the GFC.

“We’ve been lending to the planning industry in excess of eight years now, and our policies and frameworks haven’t changed through the peaks and the troughs,” Kirsch said.

But Forte Asset Solutions director Stephen Prendeville agreed with Taylor that there had been a retraction in the lending market.

“The finance is still available – it’s just more difficult to get than before. And the reason is that [the banks] want to see a lot more due diligence conducted,” he said.

Prendeville added that the stricter lending policies were perfectly prudent, and a good thing for everyone involved. 

When it came to the reasons behind the tightening of the criteria, Prendeville said the biggest factor was the economic environment. However, he also pointed to the upcoming Future of Financial Advice (FOFA) proposal to ban commissions as a potential threat to revenue streams.

Prendeville added that practices that had gone fully fee-for-service were likely to be viewed as better managed and more robust.

“There would be even more confidence if that fee-for-service is a set fee and not fund linked, because then the recurring revenue isn’t held hostage to the economic environment,” Prendeville said. 

Radar Results principal John Birt said that the GFC coupled with the regulatory reforms had been a “double whammy” for the lending market. He added that the compliance required by the FOFA regime would add extra costs to practices, cutting down revenues.

In an attempt to help its aligned practices adapt to the FOFA environment, ANZ has launched its Practice Funding Facility, according to ANZ general manager for advice and distribution, Paul Barrett.

“The ANZ Practice Funding facility is a strong endorsement of our confidence in the quality and potential of our extensive adviser network,” said Barrett.

By Darin Tyson-Chan – Investor Daily
Thu 18 Aug 2011

Advisory firm valuations are moving to having an earnings focus.

The method of valuing financial planning practices is undergoing noticeable change with a move to an earnings-based approach as opposed to a revenue-based system, according to Hunts’ Group principal Anthony Hunt.

Traditional practice valuation techniques have used calculations based on a set multiple of the firm’s revenue.

Hunt said moving to an earnings-based approach brought the valuation of financial advisory practices into line with most other business valuation techniques and had flow-on benefits to the firm itself and the clients it serviced.

“Valuing businesses on an earnings basis throws up a whole range of other issues around what becomes important in a financial planning practice,” he said.

“One of the things we particularly like about this system is that it is one set up to adopt a more corporatised model, so it’s got inbuilt efficiencies and understands the importance of making business processes efficient so the client gets a great outcome and the business itself also gets a great outcome from that.”

He said the move was a reflection of the multiple changes the financial services industry was currently facing and forced planning practices to revisit elements of the business, such as terms of trade and in particular the pricing deal in place with the incumbent platform provider.

According to Hunts’ Group senior consultant Wayne Wilson, the move had been driven by several factors, one being the global financial crisis that wiped away a significant portion of many advisers’ fee base.

Another reason is the potential impact of the Future of Financial Advice reforms. This is because traditionally the valuation multiples were calculated using the assumption an average client would generate a seven-year revenue stream. However, Wilson said the opt-in requirement meant that assumption could no longer be relied upon.

The final factor was the move by the larger institutions to increase their distribution channels, with efficiently-run planning practices being a sought after element in that process, he said.

This builds on ASIC Regulatory Guide 200 Access to advice for super fund members (RG 200) and ASIC’s Report 224 Access to Financial Advice in Australia (REP 224) in December 2010. This report found that one third of Australians now prefer piece-by-piece advice rather than holistic or comprehensive advice.

It also follows the update announcement by the Assistant Treasurer and Minister for Financial Services and Superannuation, Minister Bill Shorten, in April 2011 on the Future of Financial Advice reforms.

ASIC Chairman Greg Medcraft said: ‘Many Australians would like more information and advice before making a decision in relation to a financial product. This will help them to be confident and informed investors. The proposals outlined in ASIC’s consultation paper aim to improve access to advice and give guidance about how simple, piece-by-piece advice can be provided by anybody in the advice industry.’

Click on link below to read full article on the ASIC website

http://www.asic.gov.au/asic/asic.nsf/byHeadline/11%E2%80%93152MR%20ASIC%20consults%20on%20how%20to%20scale%20advice?opendocument

Katie Walsh

June 25-26, 2011               The Weekend Australian Financial Review www.afr.com

Suctioned into a wetsuit, slicing webbed feet through salt water while steering day- trippers 20 metres deep, is not where most financial planners would have seen their career path heading. But it’s where financial planner Kim Royce, from the West Australian town of Busselton, finds himself having just negotiated the sale of his business. Fearing more red tape courtesy of the federal government’s Future of Financial Advice reforms, Royce, 60, fled the choppy waters to become a diving instructor. “There are a lot of people my age who are prematurely retiring,” he says. “We’ve got to fill in all the – excuse the French – the bullshit.
It’s absolutely ridiculous. If someone rings me up for advice, we’re obliged to produce statements of advice, [yet] if I go to a lawyer, I don’t ask for 50 pages of advice.”
Royce is among the experienced, older set of financial planners seeking an exit from the rapidly changing
public perception-challenged industry. For Royce, it’s not the substance of the FOFA changes that concern him but the additional layer of red tape that comes with it.
For many others, the trigger is that very substance, in particular the requirement that clients “opt in” every two years to continue to receive services, a change that rattles planners who predict inertia means clients will drop off their books. The switch from scooping commissions to charging fees for services is another cause for concern, although they say it’s something they’re already moving towards. Stories abound of the
quickened path to retirement, expected gouge in revenue and increase in compliance costs.

“In the new world, planners – particularly my age – are saying it’s too difficult,” says certified financial planner Peter Foreman. “It’s forcing me and a lot of my colleagues to look at the business and say, ‘should we be staying?’.” The 61-year-old Sydney-sider began a career in life insurance more than 25 years ago after his father died young. He is one of the many experienced old-timers over 55 anticipating the new rules
with some trepidation. “For most people, if you send them a letter offering them $10 to send it back, they won’t send it back,” he says of the opt-in proposal. “Who’s going to respond under this proposal?” FOFA came about following the collapses of planners, notably Storm Financial and Opes Prime. A view among
planners is that the changes will hurt poorer clients who may no longer be able to afford advice.

Mark Harris, based in Ipswich, west of Brisbane, has 25 years in the industry and shares the same sentiments. “Because of a few bad apples the majority are being punished for no good reason,” he says. “We’re tired of being pushed and punished and blamed – it’s not our fault that Storm occurred.” He has pared back his client base from more than 3000 clients to just the highest value 250; offloading the low-
value ones.” Industry members are concerned about where exactly these “low-value” clients, traditionally cross-subsidised under the commissions model by wealthier clients, will go. “That’s the real human element,” Harris says. “It’s fine to look at the upper end of the market but these poor people have trusted us for the last 20 years and I’m going to have to walk away.”

The principal of buyers’ consultant Radar Results, John Birt, says he was surprised by the number of planners who said they would have to lay off staff or shut down. Regular workshops run by his firm for financial planners seeking to leave the industry fill up fast.

Broker Alan Kenyon called the pending changes the “straw that broke the camel’s back”. “A lot of these people who have been really good planners are saying ‘I still have the passion to give advice, but I don’t have the energy or the passion to go through these legislative changes’.”

Treasury estimates the opt-in reform would cost the average practice $100,000 – or $100 a client; a cost Association of Financial Advisers chief executive Richard Klipin warns will be passed on to consumers. “What’s really important is that people don’t get priced out of the market,” says Klipin. He says just two in 10 people receive advice and predicts this will reduce post FOFA. “We should be focusing on how to grow the market because the benefits are evident, rather than adding punitive measures.”

The Financial Services Council supports FOFA on the whole but is concerned there are elements that may make advice inaccessible. “The risk is the government failing to get the balance right [but] I think they’re cognisant of this problem,” says council Chief John Brogden.

Assistant Treasurer Bill Shorten has dismissed claims by financial planners who complain of plummeting business values due to government reforms, telling them to make way for others.

“I’m sorry if you wanted to sell your business at an inflated price on projected earnings because you could guarantee the book of customers,” he told an ACTU conference in Sydney on Friday.

“You know what? You can make a living in financial planning. The new brigade is coming through.”

Financial planners have fought the Future of Financial Advice reforms since they were announced last year. Two items in particular shook them: the proposed requirement that clients “opt-in” to renew advice agreements every year, and the banning of trail commissions.

The government has since softened the opt-in proposal to a two-year turnover period. Planners fear the change will lead to a loss of clients and ultimately lessen the value of their businesses.

Applauding most financial planners as doing a “superb job”, Mr Shorten criticised a subset seeking to sell their businesses at inflated prices. “I do have a message for some financial planners who perhaps are reaching the skinny ends of their careers and wanted to sell their· book of clients, who they never go and ask ‘do they want to renew their mandate’, at six or seven times the multiple earnings of any particular year because there is no opt in: that business model will change.”
John Birt, principal of financial planning business buyer’s agent Radar Results, said the value of businesses had dropped by 10 per cent – or 0.5 by earnings multiple – in the past six weeks alone. The drop correlated with Mr Shorten’s announcement in April confirming details of the reforms, including the commission ban and opt-in.

He said many planners had been in a “bubble” until then, doubting the policy would actually translate into law. “There were a lot of non- believers, and there still is.”

He predicted another kneejerk would come when the rules start next year. But he said it was hard to just “throw numbers” like six to seven earnings multiple around, as price depended on other variables.

Sellers’ agent Alan Kenyon of Kenyon Partners agreed. But he played down the impact of the changes, saying there was still strong demand for businesses and banks were still lending.

Financial Planning Association policy general manager Dante De Gori said multiples were now closer to three or four.

He said the changes were poorly timed for those looking to retire, whose “retirement nest egg has been considerably reduced as a result of government intervention”.

But the biggest concern was the uncertainty for those who wanted to enter the industry.

Under the change, income from relevant investments of a foreign fund, that is taken to have a ‘permanent establishment’ in Australia, will be exempt from income tax. The change will apply to the 2010-11 and later income years.

Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten said “This change uses an Investment Manager Regime (IMR) framework to provide an exemption for offshore funds engaging domestic investment advisers. This change is an important step towards improving Australia’s international standing as a financial services centre.”

The change will align Australia’s taxing rules with international practice, such as the United Kingdom’s Investment Manager Exemption. The Assistant Treasurer said that the proposed amendments will help ensure Australia has a strong, competitive financial services industry.

The change addresses a key finding of the Johnson Report — that the tax law discouraged the use of Australian based investment advisers. Currently, Australia’s taxing rules not only tax the fees earned by the intermediary, but can potentially tax the investment income of the fund even when the investor has no real presence in Australia. This places Australian fund managers at a disadvantage to foreign funds to the extent engaging a foreign fund manager would result in the investment income of the fund not being taxed.

To read full article please click here.

In general, Wrightson said, most planners making enquiries were nearing retirement anyway and more than likely some had decided to bring their retirement plans forward because they were not up for another round of regulatory change — a comment supported by Fitzpatrick.

“They’ve got to the point where they’ve had a gutful,” Fitzpatrick said.

The chief executives of the Association of Financial Advisers and the Financial Planning Association, Richard Klipin and Mark Rantall respectively, agreed that those looking to leave because of regulatory change might be doing so prematurely.

However, some advisers have had enough and one such adviser, who is in the process of making a deal and therefore did not want to be named, felt that regulators had made it too difficult for advisers while failing to root out “unscrupulous advisers who don’t know what they are doing”.

To read full article in Money Management Magazine please click here.