I love my vinyl record collection.
It started when I discovered Electric Warrior in early ’76.
The collection continues to grow despite Anna’s opinion that I’m a hoarder.
Regular vinyl still beats the best digital sound – vinyl is so much bigger, brighter and better.
However, quality alone can’t combat the convenience and AI advantages of streaming. Vinyl is making somewhat of a re-emergence, but I only buy a miserable fraction of what I used to.
As our music went digital, I can’t recall many record stores rushing to consolidate and buy out exiting vinyl shops.
Probably because it didn’t make business sense.
Is it the same for advice firms?
I’m amazed at how many advice firms are buying other advisory firms.
These deals appear attractive for several reasons.
I figure some of the appeal is similar to what drives the weekly sales from Aldi’s aisle of dreams. The offerings are relatively cheap.
The important word is ‘relatively’.
Compared to past prices, the current valuations appear cheaper.
However, past deals were not priced on today’s flatter playing field.
Past valuations were inflated thanks partly to less stringent pre-regulatory practices but primarily because of AMP’s fundamental underwriting of Australia’s advice firm valuations.
Being #1 in ‘advice’ distribution for so long allowed AMP’s old buyer of first resort promise (even the old name – the buyer of last resort – was a deceptive yet brilliant marketing tactic) the luxury of setting advisory firm market pricing for greater financial planning market.
Back then, it made commercial sense for AMP to pay 4x renewals to purchase their exiting adviser’s client bases because they had created a ready-made market as the fully-trained graduates from their own successful AMP Horizons Start-Up Academy were willingly buying at 3x to kick-start their financial advice career and business dreams.
It was a good business model. For AMP.
As sunlight is the best disinfectant, future valuations for most purchases will be based upon returns, i.e. profitability.
However, producing good profits while funding growth and managing capacity will require significantly more skills.
Another reason these deals are fashionable is comfort zones.
Buyers are experienced and comfortable advising the types of client bases being sold. Similar clients, business systems, team skills and product platforms make the alignment of purchased client bases more appetising.
Buyers reason their existing team members, experienced in current systems, will continue to thrive along with any new team members included with the purchase. New team members also promise valuable client knowledge and potential new skills in common systems.
Other benefits may sweeten the deal when additional ‘scale’ creates savings, meaning duplicated ‘hard’ costs (e.g. people, premises, technology, licensing) can be trimmed out of the combining entities.
While logical to focus on growth in a growing and familiar sandpit, buying more of the same tends to force teams to repeat the careers of their founders. As the advice industry becomes more unrecognisable from even a few years ago, building a future on what worked in the past will make for steeper career paths for all.
The fundamental reason to consider an acquisition is growth.
Like a tree reaching for the sky, firms naturally veer towards the seemingly easiest gravity-defying growth path.
Acquisitions, mergers, and takeovers expedite it.
For some owners who have worked hard for a long time, acquisitions bring something new and exciting that will result in a bigger firm.
An exciting new project might provide the needed tonic and break from the tedium of the past tough years where each working day might have felt like the same issues and the same challenges on repeat.
Unfortunately, all that glitters isn’t gold. It could just be a few sparks from a dying blaze.
Potential is not only about playing to one’s past strengths.
It is also a bet on one’s ability to anticipate future demands.
While not without obvious hurdles, in the former less regulatory, less technology-based advice marketplace, an approach of bigger is better, which involved acquiring more clients, was a solid gold strategy for greater growth, valuations, and returns for advisers.
It is ridiculous to suggest that all acquisitions of client bases are ill-founded because they are based upon what worked in former marketplaces.
For firms seeking new skills, new niches, new locations, new competencies, new technology, and new back-offices, acquisitions may be a sensible strategy. For provincial and regional firms, acquisitions are a proven and smart means to grow diverging advice channels.
However, getting bigger by acquisition would not have helped the old record stores.
When nearly every music fan can afford 1000-songs-in-your-pocket music experience, client value can shift quickly.
Acquiring during these tectonic value shifts makes acquisitions and the assumptions driving them more precarious and not only in danger of failing to provide a return on the investment and hard work but worse, missing the valuable opportunities already in client bases due to attraction to old rather than new value propositions.
Value is shifting in the financial advisory industry.
These are the best times to lead that shift.
Bang a gong, get it on!
What do you reckon?
ABOUT JIM STACKPOOL
For over 30 years, Jim has influenced, coached, and consulted advisory firms across Australia. His consulting firm, Certainty Advice Group, coaches, trains, and builds advisory firms delivering comprehensive, unconflicted advice, with fees priced purely on value. He is growing a strong and collaborative community of advisory firms aligned on Australia’s only Certification Mark advice standard for comprehensive, unconflicted advice – Certainty Advice. He has authored four books regarding financial advice, with his latest What Price Value available now since March 2022.
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