I reckon the current valuations of financial services firms reflect a massive and growing Ponzi scheme.
A Ponzi scheme underwritten by Australia’s major financial institutions.
My reasoning is as follows:
- Valuations of 2.5+ times on-going revenue are still common for financial services firms sales whilst accounting firms struggle for a .90 times on-going – both offer advice, accountants are priced on hours sold (usually) and financial advisers on products sold (or under management) or on ‘services provided’;
If buyers are still willing to pay 2.5 years worth of today’s recurring revenue to buy firms they must know something about the market in 2.5 years time that I don’t. There’s no way I believe advisers will be able to charge a similar recurring product revenue fee in 2.5 years that they can receive today. Prices will drop if due nothing else other than competition. (But there will be lots of other factors including tightening markets, improved offerings, on-going legislative changes and increasing consumer awareness of quality advice and products);
Buyers may be willing to pay the 2.5+ times because they aren’t advisers but aggregators resembling the property developer who buys a dump, does it up and re-sells it (i.e. they switch to cheaper operating environments or platforms, buy more and aggregate them for re-sell to an institution or own possible listing and then exit) This sort of activity in property created GFC #1 and will most probably end in tears for the aggregators left holding most of the over-valued client bases;
The financial institutions are currently desperate for distribution channels to sell their products and platforms. Today’s world economy provides unmistakeable lessons that relying on continuously increasing marketplace returns alone won’t provide the return on capital that analysts have come to expect. Growth by acquisition (as well as ruthless cost cutting) is something they know how to do (as opposed to ‘selling’ non-product advice) and they are currently doing it with a vengeance (i.e. Count, DKN, AXA, and watch for other moves with groups such as WB Financial, AFS, Matrix and Wealthsure);
Impending Future of Financial Advice (FOFA) suggests that these institutions will not be able to subsidise their ‘aligned’ dealerships and friendly partners via ‘product rebates’ as they have (if FOFA becomes law) – how else can they support their ‘friendly partners’? Enter the old chestnut – buyer-of-last-resort offers;
Institutions continue to see a good return by over-valuing aging financial services firms. They provide a guarantee of their future value which only they can really afford. This creates a ‘false’ floor for valuations that affects advisory firms whether aligned to an institution or not. These ‘false’ floors are built up by the practice that the institution can buy at say 2.5 times (or more), ‘on-sell’ to another friendly (who’ll continue to maintain the products from the institutions product/service list) at a discount of maybe 2.0 times with full knowledge that over time the products under the management of the new purchaser will provide the inevitable return on investment many times over.
Who pays for all this?
Nope – it’s the people who buy the institutions products that pay for everything – the consumer.
Is that a good Ponzi scheme or what?
What do you reckon?