Still waiting for prices to peak?

Is this the best of times to sell client bases or your practice?

It could be.

I believe the answer depends on the following external factors:


  • Client sentiment
  • Government legislation
  • Product makers’ tactics

I don’t believe the internal strategies and tactics of most financial planning businesses will have much bearing on the issues that will most affect their valuation. Most of these firms don’t appreciate the precarious position they’re in as they bask in ‘dot-com’ (i.e. doomed) buyer of last resort valuations provided by their ‘aligned’ product partners. At the slip of a pen, their payouts could crash, their conditions could become more onerous, or both.

Don’t get me wrong – great advice businesses will always command a valuation premium. Advice businesses that consistently do the following things will always be exceptions to market valuations:

  • produce satisfied clients (where satisfaction is judged objectively)
  • retain, enthuse and manage staff
  • generate recurring good profits (above 35% EBITDA – earnings before interest, tax, depreciation and amortisation)
  • don’t suffer key person dependency
  • are known as experts in their selected markets

There’s a well-known human tendency toward overconfidence in our own beliefs – i.e. most of us consider ourselves to be above average, and I believe that most financial planning businesses are heading into a widening ‘Value Gap’ (refer to for info on the Business Value Gap Calculator) – i.e. an increasing difference between what they believe they are worth, and what the market believes they are worth.  I predict the industry’s ‘value gaps’ will widen in direct proportion to the increasing number of principals of financial planning firms wishing to exit from this industry.

Client sentiment

Client and consumer sentiment will act as the initial catalyst widening the ‘value gaps’ for most financial planning firms. The industry rule of thumb for valuations is still renewal streams, the majority of which are product based commission payment streams.

However, regardless of whether your clients pay commissions or not, consumers hate them.  These consumers will weaken the current dam wall of opinion, no matter how much defence current principals provide. The argument of consumers will be swelled by product providers who don’t use commissions.

Then, after government interventions and reaction by product makers, consumer sentiment escalates, busts the dam wall of former opinion, and floods everything in its path.  Observe how consumers and providers have embraced climate change. The hybrid electricity/fuel car Toyota Prius is now the third best selling car in Australia.

Whilst financial security is important to most of us, our busy worlds leave little time to ponder superannuation, insurances, tax structures, and savings plans. Our clients and most consumers are more preoccupied with other personal matters. Our financial advice services aren’t ever-present on their emotional radar.

However, there are a few things they hate:

  • getting ripped off (i.e. extracting fees from inactive clients);
  • being taken as fools (i.e. hiding prices in confusing percentages rather than dollar terms); and
  • un-level playing fields (i.e. most advisers have to resell their services annually, whereas planners only have the upfront placement and are assured on-goings).

That’s when it gets emotional and does get a regular spot on the consumer sentiment radar.

Government legislation

The Financial Planning Association, Australian Securities and Investment Corporation, Reserve Bank, Australian Competition and Consumer Commission, and Australian Consumers Association are doing more than just waving flags of change for our emerging profession regarding the use of commissions for pricing our services.

The Superannuation Guarantee isn’t going away, but as a business owner you have to be prepared to consider and plan for a future without commissions from superannuation monies. The Minister for Superannuation and Corporate Law, Nick Sherry, claims he will ensure a new focus on fees and charges for our industry.

Government legislation will act as the main dam buster of opinion and former practices. Its extent and when and how it will be introduced depends on the wisdom and intent of the legislators and their advisers. It’s a question of when, not if.

Product makers’ tactics

The product makers will react quickly. As none of them are championing innovation, there are too few clues to pick the future partners of first choice for advisers of the future. The product makers will understandably produce new options and products, hoping to provide the returns their shareholders have come to expect. If distribution channels need reorganising, they’ll do it.

Obviously our clients will still need insurance, investment, savings products, and product related services, so there will be a place for product makers in the industry. But when changing legislation challenges them to actually walk their talk about being client-focused rather than product-focused, we’ll see how well the giant wealth management groups can dance.  It won’t be easy for most of those whose overseas parents do not appreciate the fast-paced change of advice in Australia, unique for a small country with the world’s fourth largest funds management industry.

So what do you do as the owner of a financial advisory firm?

The same logic that has you backing up your computer systems suggests that if you’re a business person committed to more than five years in this industry, you require a backup plan. You need to start exercising new muscles just in case the future is different and legislation changes. Even if it doesn’t change and I am totally off target, your business will still benefit from becoming a better price-maker, rather than a price-taker or price-setter based upon the products you sell, not the advice you provide.

Steve Prendeville from Kenyon Prendeville still tells me there are more buyers than sellers. For those with less than a five year commitment to this industry, maybe these are the best of times to help you be successful on purpose with your next step into the future. Even for those enthused about the longer term future for our industry, perhaps the over-population of buyers is just what you need to release those clients who were sold old expectations, perhaps by previous owners. Take the opportunity to slim down, take the capital, and gear up for a more advice-based future.

No good adviser would deny that good product design and support is critical for their clients. But they’d also agree that in any final analysis of appropriate options, it’s the advice that really makes the difference for anyone trying to make the smartest financial decisions about their future. The value is in the advice more than in the product…we all know that, but it seems some of us are going to be dragged kicking and screaming.

These are the best of times to be building a quality advice business.

WordPress Image Lightbox Plugin