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Radar Results has seen a decrease in requests for valuations on financial planning practices; however, it’s interesting to note an increase in valuations for divorce and property settlements. Before the GFC, most valuations were for finance applications, or for the lender to check on the equity-to-loan ratio. These days, very few are for this reason.

Whilst the total number of requests for a valuation has fallen to approximately 10 per month, down 31% on 2010, Radar Results has seen a surge in the number of valuations required for divorce.  Another change is the higher percentage of valuations requested to change the shareholding between partners in a financial planning business. Younger partners wish to buy a larger stake in their planning business, and require a valuation by an independent, registered valuer.

A concern within the financial planning industry is that there appear to be valuations prepared by unqualified and unregistered valuers, leading to incorrect pricing, which can, in turn, lead to problems if there is a dispute; and, therefore, a court hearing.

Another concern is that not all valuers are prepared to appear in court or, for that matter, even travel. A valuer providing a valuation for a divorce settlement is often required to appear in the Family Court to answer questions.

Loan books in big demand

Surprisingly, a number of financial planners are now looking to acquire loan books so that they can add additional revenue to their businesses. Cross-selling opportunities are also enhanced. The banks had moved to take much of the loan work back into their branches, which put a squeeze on trails and upfront revenue. The last 2 years had seen the multiple paid for loan book recurring revenues reduce to between 1 and 1.5 times. More recently, and on the back of demand from financial planners, the multiple has increased. If you would like to know more about how much a planner or mortgage writer would currently pay for your book of clients, please email me at john@radarresults.com.au.

RadarBC - Business coaching for financial planners

In 1995 I hired a business coach and then went on a 2 day business-coaching workshop. From there a new client value proposition was established, and within 6 months my revenue had doubled. I continued to pay my business coach a retainer for the next 7 years. I changed business coaches in 2004, appointing Radar’s current principal coach, Michael Wynter. I’ve been with Michael for 7 years and have since formed Radar Business Coaching (RadarBC), engaging 5 more business coaches.
The main problem I identified with business coaching is that the coach will provide you with advice, but you’re the one that needs to implement that advice. RadarBC provides a Strategy Coach and an Implementation Coach, solving the problem known as FTI, or Failure to Implement. To learn more about RadarBC go to our website www.radarbc.com.au

Radar wins marketing award 2 years running

Radar is proud to receive the 2010 All Star Award for the second year running, chosen out of over 400,000 organisations. 

Businesses work hard to build strong relationships with their customers through marketing and some, such a Radar, truly excel in this effort,” said Gail Goodman, CEO, Constant Contact. “We’re proud of the role we play in helping Radar be successful and we look forward to continuing to assist them with their marketing efforts.”

Fiduciary duty ‘beefed up’

Fines for financial advisers breaching their fiduciary duty could increase dramatically, moving the current maximum fine of $500 up to $200,000 when new legislation is introduced next month. The Government wishes to amend the Corporations Act to explicitly include a statutory fiduciary duty for financial advisers operating under an AFSL, requiring them to place their clients’ interests ahead of their own.

Currently an authorised representative’s defence is to simply rely on the Licensee’s instructions and advice. If this new legislation is passed, then the authorised representative becomes liable. The proposed reform may place the adviser (authorised representative) in a position similar to that of a company director, where if found to be reckless, the fine under a civil action may increase from a maximum $500, to $200,000. If ASIC also decides to be involved in the complaint, then the new reform will allow for criminal liability, and a prison sentence of up to 5 years. At the moment, it’s not considered a criminal offence if an adviser is found guilty of being reckless, and not acting in the client’s best interest. The new law will allow for court awarded compensation, paid by the adviser to the client.

Media reports have indicated that planners feel that the fiduciary duty that currently exists, is not much different to the one that’s being introduced to parliament next month. In summary, we now have a $500 fine, no jail, no compensation and next year, $200,000 fine, 5 years jail and compensation. It would be interesting to see if any court awarded compensations will be covered by Professional Indemnity insurance if the adviser is found to be ‘reckless’.

Financial Planners and the Future of Financial Advice Reforms

Consultancy firm, Radar Results, has done a survey of financial planners, to gain feedback on the Future of Financial Advice Reforms, which are expected to be implemented in July 2012. The survey required answers to questions about the adviser’s gender, age and whether they own the business.  Over 85% of responses (349) came from males and 66% were aged 45 to 64. Radar’s survey revealed a high proportion were self-employed, 319 in total, or 78%. The principal of Radar Results, John Birt, said he was surprised by the high level of self-employed, but, then again, the new reforms would have a greater impact on business owners than on their employees.

A total of 405 financial planners responded, with 584 comments and remarks. Mr Birt said, “I was taken aback by the number of comments and the many business owners who said they would have to lay off staff, or even close their doors. I once owned a planning business that took 20 years to build and, if a sudden change in the law had seen its value plummet, I wouldn’t have been happy either.”

All the 584 anonymous comments, some of which were quite lengthy and impassioned, together with the overall results, will be passed on to, The Hon Mr. Bill Shorten MP. The results will also go to every member of the newly-formed 18-member advisory panel on Financial Advice and Professional Standards.

There were other interesting responses to the survey: when asked the question ‘Which of the following proposed reforms do you want?’ 91% of respondents (356) said ‘no’ to the Opt-In proposal.

Furthermore, 57% (233) answered ‘very likely’ when asked ‘With each client having to sign an agreement every year [by opting in], do you think you will lose clients? ’ and 20% answered ‘somewhat likely’; a total of 77%. Other questions in the survey revolved around the size of the business based on Funds Under Management (FUM): ‘Have you moved to fee-for-service yet?’ and ‘How will the new reforms impact on your business?’

To view the results online, minus the comments, click here. Open until 14.12.2010

To request a copy of the results, including comments, send a blank email to survey@radarresults.com.au

Past sale prices of financial planning practices are really not a good indicator of how much you should pay for them in the future. The past is the past, and if someone paid 3x, 3.5x or even 4x, the recurring revenue (RR) for a business previously, what relevance would that have for today’s purchaser? Very little, I would say.
Planners have tended to look at past transactions to guide them for the future. If, in 2007, you purchased a FP business at 3.5xRR, and the RR of the business halved during 2008/09, you will have ended up paying 7xRR.
Towards the end of the GFC planners thought they could acquire a FP business at a bargain price. They paid RR multiples of around 3x or more, hoping revenues would double and therefore halve the RR multiple they had paid to, say, 1.5x. This didn’t quite happen, but some planners did pick up bargains and, from March 2009 onwards, some made nice recoveries.

Looking to the future. What prices are planners asking for their financial planning businesses today? Through Radar’s marketing, we have developed a summary of nearly 100 practices wanting to sell. Approximately one third of these practices do not provide a clear sale price, but simply say ‘price and terms negotiable’.
The balance are asking for between 2x and 4xRR; however their asking price averages out at 2.79xRR. Larger practices, which ask for a multiple of EBIT, were excluded from this exercise. Note that 2.79xRR was the asking price, the eventual sale price being somewhat less.
Sale terms will also change, from the seller requiring only a 20% clawback to meeting half way at 25-30%. Instalment payment terms will also alter during the sale-negotiation phase, possibly ending with a final instalment after 1 year; whereas the purchaser may have originally required 2 years.
In the future, I see accounting sale multiples blending with FP multiples and moving away from the ‘recurring revenue scenario’, which has existed for the past decade. Looking ahead, total revenue and EBIT will form the new valuation methods. The larger practices and institutions will consume the smaller players, and RR valuations will disappear.

What should you pay for a financial planning business?
Based on acquisitions made by clients of Radar Results over the past 4 years, it’s apparent that risk insurance portfolios are ‘king’, followed by accumulator client registers. The perceived value of the portfolios of older investment clients, many of which were ’smashed’ during the GFC, is certainly not as high as it once was. A reducing investment-account balance, as retirees live off their money, together with a lack of cross-selling opportunities, has seen them fall from grace. During the 1980s and 90s the retiree market was sought after, due to the easy servicing of their portfolios; they were always on holiday and never annoyed you.  
Today buyers are more cautious, and if they are going to pay 3xRR for a business then it needs to perform. The ability to increase the revenue by selling aligned products, a better value proposition through IT enhancements, and reduced expenses from dealer’s fees, have all encouraged quick growth by acquisition. Adding a $400K book to your business can instantly increase the bottom line by $300K.  So, at the right price, why wouldn’t you do it?

An indication of FP prices today:-         

                               City           Regional

Retirees                     2.5x               2x
Accumulators             3x                 2.5x
Risk clients          3.5 to 4x          3 to 3.5x
SMSF any age        3 to 3.5x        2.5 to 3x
Corporate super      1 to 2x         0.5 to 1.5x

The multiples above can vary depending on terms offered by the vendor, actual location of the clients, client ages and the particular investment products recommended.

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?