Previous Newsletters

Market for lower tier clients heats up

More smaller practices looking to sell

More principals sell less profitable client books

Commission trail won’t go cold

One in four will leave industry

Acquisition consultant expands offering

Bowen targets volume rebates

Planning practice sales up

Deal breakers of financial planning business sales

Planning firm owners face tax slug

Financial planner sellers return to the market

Planners ‘trending away’ from low-cost dealer group model

Opinions differ on valuation prices

Delicate balance for geared advice firms

Banks force struggling firms to sell client lists

Radar appoints Queensland Associate

Loan approval timeframes still slow

Why succession planning adds value

Consulting firm Radar Results (Radar) has provided valuations to the financial planning industry for many years. It became apparent volume bonuses were to be securitized by the government as being an incentive paid by the product provider to attract funds under management (FUM) and hence, may be banned. The latest Financial Services Reform paper released 26 April 2010 has confirmed this scenario.
 
Since 2008 Radar has not included the revenue from volume bonus payments in valuations based on recurring revenue multiples. It’s difficult to see how the government can legislate to stop volume payments being paid under a different disguise. The payment of a volume bonus or over-ride has been a common practice amongst many platform providers to attract and retain higher FUM. The platform providers, who seem to be the main culprits, may pay the bonus under a different name, say “a marketing allowance”. It’s also been muted that advisers may end up buying their own platform, which will then pay the adviser the volume bonus in the form of a higher Adviser Service Fee (ASF).
 
The dilemma is that when selling a financial planning practice today, should you include the volume bonus in the calculation of recurring revenue? It’s been common for advisers to receive the minimum ASF of say 0.4% plus another 0.2% as a volume bonus, often paid monthly in one lump sum, quite separate from ASF. Advisers may need to convert their clients to a true “fee for service” arrangement by 1 July 2012 and then substitute the “lost” volume bonus as a higher ASF. With revenue multiples falling combined with lost volume bonuses, the value of a planning business could be worth a lot less. Radar provides advisers with a free appraisal service - go to Appraisals on our website if you wish to receive an appraisal by email.
 
INSURANCE COMMISSION BANNED OR REPLACED?
 
The Cooper Review is particularly harsh and we would be surprised if it’s implemented in its current form, especially in relation to risk insurance. The debate between industry funds and the non-industry fund financial planning sector is ridiculous. The industry funds should be tipping all the costs of those adverts back into their member’s super accounts. If I had an Industry Fund, I wouldn’t be too pleased seeing all that money wasted. As a whole, its effect on the financial planning industry is serious and unwarranted. Many advisers who have relied on trails and commission for their lively hood over say 20-30 years, particularly life insurance agents, will be seriously affected by the Cooper Review; a Review which some say is politically motivated. 
The government wants the adviser to replace the commission that’s paid by the insurance company from selling an insurance product, with a professional fee. They (the government) would also like financial advisers to eventually replicate the fee system of accountants and lawyers. The perceived benefit to the superfund member is a higher end payment at retirement. The work that’s been provided to the member/client now needs to be paid directly to the adviser by the superfund member. This could be a very difficult task, invoicing and collecting all these fees. The signing of an annual Renewal Letter by the client also makes this servicing task more difficult and brings into question client retention. After June 2012 the member may have to pay for advice on any insurance within a superfund. So, how does the financial adviser replace the banned commission that he or she had been receiving on the existing insurance policies if the superfund member decides they don’t want any ongoing service?

Your client’s interests must be placed ahead of your own under proposed legislation issued on 26 April 2010 by Minister Chris Bowen. The new reforms, which apply from 1 July 2012, will place advisers under the Corporations Act in respect to a financial adviser’s fiduciary duty. This is similar to the fiduciary duties and obligations as a company director and may carry the same penalties for breach. Therefore, advisersshouldn’t be too worried about being sued for poor advice under any civil action; the penalty under the Corporations Act may be similar to that of a company director and deemed a criminal offence, with fine and possible jail sentence. Currently you cannot be an Authorised Rep or hold your own licence if you have a criminal conviction. This will certainly beef up the responsibilities placed on financial advisers, their licencees and more importantly, protect the consumer.In relation to trail commissions being banned, compulsory annual renewal notices and these new reforms being retrospective, I pose the following comments and questions:- Existing agreements between clients and their advisers for the payment of fees and services supplied may not be retrospectively affected by the new legislation, however, any “change” in the advice or service offered ie new advice, may well be deemed that a new agreement has commenced. Then the opt-in commences?

 

Workshops for planners retiring or just leaving the industry

Radar Results will be holding a series of workshops to help planners leave the industry and understand the complexities when selling their practice or client registers. Specialist lawyers and other consultants will be able to answer all your questions. Some of the topics to be discussed are “How to value your business? The role of a lawyer and accountant in the sale. Vendor trade restraints, claw-backs, transition periods, client transfers and information memorandums. First workshop is in Melbourne Tuesday 15th June Boardroom Hall Wilcox Lawyers 12-2pm. Free with lunch provided.

Sydney will be held Tuesday 6th July 12-2pm. Free and lunch provided. To book please email michele@radarresults.com.au or phone Radar’s Operations Manager Michele Conroy on 02 4384 5670. Brisbane and Perth workshops to be held in late July and August 2010.

After Chris Bowen announced on 26 April 2010 new legislation will be introduced affecting commissions, trails, review fees, volume bonuses and upfront fees, Radar Results conducted a poll. Radar Results polled financial planners and other financial service industry people asking “How will Chris Bowen’s new laws (2012) affect your business plans?”

We received 732 responses with more than half suggesting their business plans would be affected by Chris Bowen’s new reforms with more than 1 in 4 respondents leaving or retiring sooner from the financial planning industry.

Some 12 per cent (87 respondents) said they would retire sooner, 14 per cent (101) said they would sell part or all of their business, and 16 per cent (115) said they would leave the industry. Some 44 per cent (324) would not change their business plans as a result of the reforms

Many suggested it would be positive, allowing them to expand and acquire more practices.

Those polled and said the reform laws would not change their business plans totalled 324, or 44% of the responses.

Radar Acquire New Division for Accounting Practices

www.radaracquire.com.au

The group’s operations manager, Michele Conroy, announced a new division will commence this week specialising in the acquisition of accounting practices. The name of the new service will be Radar Acquire.

Conroy said “the demand by Radar’s existing clients to acquire accounting practices has been growing for several years. We see more of our financial planning clients adding accounting practices to their business, and this is a trend that would only continue.”

The group’s managing director, John Birt, has been working with accountants for more than 26 years and he’ll be using his experience to run this new division, Radar Acquire. 

     Office of the Hon Chris Bowen MP
         Minister for Human Services
Minister for Financial Services, Superannuation
               and Corporate Law

THE FUTURE OF FINANCIAL ADVICE
INFORMATION PACK

MONDAY 26 APRIL 2010

To access the Government’s Future of Financial Advice reforms paper. Click on the below link

http://ministers.treasury.gov.au/Ministers/ceba/Content/pressreleases/2010/attachments/036/Future_of_Financial_Advice_Information_Pack.pdf

Message from the Minister

The Government recognises the important role played by financial advisers1 in assisting people to
plan for their future. Longer term challenges such as the ageing of the population, as well as
recent events such as the global financial crisis, underscore the need for quality advice.
It gives me great pleasure to announce significant reforms to the provision of financial advice,
which I believe will improve the quality of advice, strengthen investor protection and underpin trust
and confidence in the financial planning industry. These reforms should ultimately encourage
more people to seek financial advice.
This package represents a comprehensive Government response to the recent Inquiry into
Financial Products and Services in Australia by the Parliamentary Joint Committee on
Corporations and Financial Services (the PJC Inquiry, see Attachment A), which was set up in the
wake of collapses such as Storm Financial and Opes Prime.
In this respect, the Government’s response is guided by two overriding principles:
• financial advice must be in the client’s best interests – distortions to remuneration, which
misalign the best interests of the client and the adviser, should be minimised; and
• in minimising these distortions, financial advice should not be put out of reach of those who
would benefit from it.
The Future of Financial Advice contains three key reforms, which will apply from 1 July 2012:
• A prospective ban on conflicted remuneration structures, including commissions and any
form of volume based payment. In addition, percentage-based fees (know as assets under
management fees) can only be charged on ungeared products or investment amounts.
• The introduction of a statutory fiduciary duty for financial advisers requiring them to act in the
best interests of their clients and to place the interests of their clients ahead of their own
when providing personal advice to retail clients.
• The introduction of adviser charging regime, which retains a range of flexible options for
which consumers can pay for advice and includes a requirement for retail clients to agree to
the fees and to annually renew (by opting in) to an adviser’s continued services.
The reforms also significantly expand the provision of low-cost simple advice (known as intra-fund
advice) to areas including transition to retirement and the nomination of beneficiaries. There will
be a review of whether other measures are needed to clarify whether simple advice can be
provided in a compliant matter outside intra-fund advice.
I welcome the significant efforts of industry, including the Investment and Financial Services
Association (IFSA) and the Financial Planning Association (FPA) to remove commissions. The
reforms clearly support their efforts by introducing enhanced standards that apply across the retail
financial services industry. The reforms will greatly reduce the incidence of investors being
recommended financial products as a result of sales incentives offered to advisers. Clearly, clients
should receive advice that is in their best interests.

Chris Bowen

Minister for Human Services, Minister for Financial Services, Superannuation and Corporate Law

1 The reference to the term ‘financial adviser’ in this Information Pack generally refers to those who provide ‘financial
product advice’ under the Corporations Act 2001.