Highest Prices Ever

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RECESSION 2017-18

According to then Prime Minister Paul Keating, the last recession we had was ‘the one that we had to have’. During this recession, interest rates rose to 18%, loan delinquency rates hit 12% and unemployment levels hit nearly 11%.

Expectations are that we are in for another bumpy ride next year. While I’m not sure if the recession of the 90’s will be repeated, property prices are tipped to suffer.

With respect to investing, overseas fund managers have Australia on a ‘no-go list’, meaning home and apartment prices are the highest in the world when compared to our incomes. Bar New

South Wales, every state has an over-supply of dwellings, with an additional 200,000 dwellings to be completed over the coming year, and 217,000 the year after. This oversupply and failed settlements could lead to apartment prices falling by 20%. Developers need to sell the unsold stock to meet their debt obligations.

Many financial planning practices have been advising their clients to buy property, particularly within their Self-Managed Super Fund. What effect would property prices moving down 20% have on the client’s overall financial situation, and would the client have a case against the planner’s AFSL or licensee? How will a recession impact financial planners, the financial industry and more importantly their clients? Being heavily geared into just one asset class, rising interest rates, higher unemployment and lower property prices are a deadly mix. 

HIGHEST PRICES EVER

Today, prices being offered for these businesses or client registers are the highest they have been in eight years. This is primarily due to the low interest borrowing rates and finance being plentiful. AMP has just changed their Buyer of Last Resort (BOLR) formula, now placing non-AMP products in the same category for valuation as AMP products. I believe this applies to the Charter and Hillross practices as well.

AMP Bank is offering their financial planners loans to expand, some at interest rates of 7% fixed, principal and interest over 10 years, and preferably they’re being encouraged to buy non-AMP practices or client registers, and move them into the AMP practice. Once again, this includes Hillross and Charter. This high demand by AMP linked advisers is forcing up the prices paid for financial planning activities.

BABYSITTING

Another factor that has forced up prices being paid for financial planning practices is the internal need by licensees to retain their own advisers, otherwise known as ‘baby-sitting’. Some medium-to-large licensees have offered to buy the practice themselves, as a temporary hold until they can find another adviser to join their group, and then on-sell it. The existing clients and associated revenue is retained.

LOAN BOOK TRAIL PRICES RISE FURTHER

In the past three years, loan book prices have nearly doubled, with some now selling for between two and three times the trail. Some mortgage brokers have sold their trail books for over three times the trail, however, in these situations there’s a correlation between the aggregator and the loan broker, with the most sought after loan books being aligned to aggregators in PLAN, FAST, Connective, AFG and Choice. Cross-selling opportunities is the main reason for this price rise, along with low supply. So far this year, clients of Radar Results have purchased fewer than 10 trail books, but if I had 100 trail books, our clients would’ve purchased them all. Financial planners really want to buy loan books as well, and tend to outbid the mortgage brokers.

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ACCOUNTING PRACTICES UNDER PRESSURE

Accounting practices haven’t seen the same demand for their practices as financial planners and loan brokers have seen for their businesses. Many accounting practitioners, whether a sole practitioner or partnership, seem to have higher levels of business costs, such as salaries, and cannot pass the full effect onto their clients. These days, taxation clients are more demanding, more selective with the services they require and more critical of the value for money concept.

Accountants need to do more than just lodge tax returns. Many are under- charging, which I feel is a confidence issue. Accountants that provide advice, administration and compliance work to their SMSF clients are either over-charging by an exorbitant amount or in many situations not charging enough. The gap is enormous, with $895 per annum to do the full year’s work for a SMSF, and $8,000 per annum to do basically the same work.

Prices paid for individual tax return clients, commonly called ‘I returns’, have fallen. The main steadier for accounting practice prices is the demand by financial planners looking to reach a large number of prospects to sell loan/s, planning services, SMSF set-up and advice, along with risk insurance products.

Radar’s Six Monthly Price Guide

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An indication of prices as at 31 March 2016 

 

Revenue Type Recurring Revenue multiple
Investment and super clients (age 80 yrs+)  1.0x to 1.5x
Investment and super clients (age 65-79 yrs) 2.0x to 2.5x
Investment and super clients (age up to 64 yrs) 2.5x to 3.0x
Risk clients (under 55 years) 3.3x to 3.5x
Risk clients (over 55 years) 2.5x to 2.8x
Corporate super clients 0.0x to 0.5x
Cs and Ds – mix of both risk and investment 2.0x to 2.5x
Mortgage clients 2.0x to 2.5x
Accounting fee – business clients 0.9x to 1.2x
Accounting fee – individual returns 0.5x to 0.9x

 The above multiples can vary depending on the terms offered by the vendor, geographic location of the client, age of the client and the investment products within the client’s portfolio. Multiples paid for risk books or insurance revenue-based practices will vary depending on the client’s occupation, size of premium, type of policy (stepped or level) and geographic location of the client. The multiples displayed above are for high-quality risk clients. The table above is based on market activity over the past six months to 31 March 2016

THE MAIN CHANGES

The main change Radar Results has seen in the buying and selling market for financial planning practices has been the increase in demand for older investment and insurance-based clients, for example, where buyers had heavily discounted the multiple of recurring revenue for investment clients over the age of 75, there has been a trend to buy now at these attractive rates. Further, as the life expectancy of an 80-year-old female is now 10 years and eight years for a male, there is real value in these ‘older’ clients. Therefore, Radar Results’ Six-Monthly Price Guide has moved the age category from 75 years to 80 years and above.

Similarly, with risk insurance clients, the age bracket has been moved to over and under 55 years of age, replacing the previous 50-year-old age bracket. Once again, buyers are no longer concerned if risk clients purchased are over the age of 50, or 55 for that matter, as the likelihood of the policies remaining in force to the age of 65 is now higher due to people retiring at a later stage in life and having children later. The higher mortgage levels on the principal residence also need protection for longer.

EBIT MULTIPLES

The multiple paid for larger financial planning businesses has a price range of four to six times the normalised EBIT, up from 5.5x as the maximum rate. Radar Results has seen larger, better quality practices come to market, commanding EBIT multiples not seen since prior to the Global Financial Crisis (GFC).

The price range for mortgage management businesses is 3.5 to 4.0 times the normalised EBIT, and 3.5 to 4.5 times the normalised EBIT for large accounting practices.

 

LINGERING EFFECT OF FUTURE of FINANCIAL ADVICE (FOFA) REFORMS ON PRICE 

When selling your business, many more questions are now being asked by potential buyers, such as:

–      Do all your clients need a Fee Disclosure Statement (FDS) issued or just the fee-for-service clients?

–      Pre-July 2013, which of your clients are grandfathered under FoFA?

–      How many clients need an opt-in letter sent every two years?  

–      Since July 2013, how many clients are new?

–      How many are grandfathered clients, and have since had their investment and strategy substantially change, turning them now into opt-in clients?

–      Is the volume bonus going to move to my licensee?

–      Will the over-ride bonus previously paid by product providers to the vendor continue after the sale?

The additional red tape caused by FoFA reform has led to fee-for-service multiples for client registers, and planning books to either plateau or fall. Certainly, risk insurance books and businesses haven’t been affected by FoFA reform, and still command the highest multiples of recurring revenue within the financial service sector.

Accounting practices remain in high demand, particularly in the city and regional areas. Mortgage book prices are at an all-time high, and buyers are keen to pay cash for even the smallest books, for example, $2,000 per month trails. Unfortunately, the corporate superannuation section still suffers, with many planners not even prepared to make an offer. With commissions being turned off early next year, planners are now in search of institutions to replace these commissions with a flat fee per employee.  

High Netwealth Clients In Big Demand

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Radar Results has received a number of requests from financial planners looking to buy High Net Wealth (HNW) clients. To clarify, a HNW financial planning client can be described as one with investments under management of at least $1 million. Some advisers would say that an investment portfolio of this size is not particularly high nowadays. But, if both the husband and wife each own at least $1 million, then the family has $2 million in funds under management (FUM).
Depending on age, prices paid recently for these types of HNW clients can range from three to four times the annual fees. To receive a price multiple in this range, the preferred ages would be between 40 and 60 years. The Sydney CBD and north-west regions of Sydney seem to show the highest demand for this client style.

NON-OPT-IN WORTH MORE

When you buy a financial planning register or business which has clients that were established as a new client before 1 July 2013, they will not require an opt-in letter and are preserved as being non-opt-in clients. The pre-July 2013 clients will not require any opt-in letters to be sent, even if the adviser and licensee are completely new as a result of the sale. Demand for these non-opt-in clients has actually increased, and prices reflect this higher demand.
Interestingly, if a client moves from one adviser to another without being part of a sale transaction, then the grandfathering of the opt-in disappears. A letter must then be sent out every two years requesting confirmation from the client that they wish to continue with that adviser, and consequently receive the same services for the disclosed fees. If the letter is not returned, fees and commissions must be turned off. A reduced level of service offered to the client or an increase in fees, will also result in the preservation of non-opt-in being removed.