Ifa last week reported that practice owners are being urged to drop low-value clients alongside the release of the 2020 Financial Planning Practice Sale and Valuation Guide. Shedding unprofitable clients from their books was reported as one way to retain or indeed bolster the valuation of advice businesses. According to the article, it has become increasingly difficult for an adviser to be profitable when fees charged are under $3,000. Hence, books with clients at or below this level struggle to attract more revenue, with many unable to be sold at all. It is unfortunate that the (unintended) consequence of the Royal Commission reform is fewer Australian households will have access to an adviser.
Impact of the Royal Commission
Back in 2018 when the impact of the Royal Commission was just starting to be felt, one financial planner, who we will call Bob, had a small advice business and decided to exit the industry late that year. His business serviced mainly middle-income clients and was arguably more of a lifestyle proposition, and with the scrapping of trail commissions, impending FASEA standards and accelerating professional indemnity insurance premiums, he decided he would get out and sell his client book. His fee for service clients, which was the smaller part of his book, was traded at about 2.5-3.0x revenue, and grandfathered commissions from insurance policies at about 1.5x. On top of that, he was able to sell his AFSL some months later and so made a complete exit. At that time he wasn’t overly thrilled with the result based on multiples that would have been achieved some 5 years earlier, but in light of what we are seeing today I suspect he is quite happy he exited when he did.
Unfortunately for the industry and his clients, Bob was actually a really good adviser but, typical of many smaller financial advisers, was reliant on low value clients with trail commissions on insurance policies and other financial products. To add to his challenges, Bob was a technology laggard. I suggested to him back in 2018, that a platform like myprosperity could help him capture and identify whole-of-wealth opportunities across his base, and it would also allow him to deliver his services more efficiently. In fact, it would enable him to handle a higher volume of clients with the same resources. Unfortunately, Bob did not want to change. The highly manual nature of Bob’s practice meant he could not scale and hence improve profitability, and when the fallout of the Royal Commission hit, running a sustainable business became unachievable.
Where the opportunities lie
Bob’s story is not an isolated case. We are seeing a growing number of capable advisers exit the industry due to their struggle to operate profitably. Client profitability will continue to be an important focus for the advice industry, and will separate the successful firms from others. The outlook from Centurian shows a growing number of Practice Principals are cleansing their books of unprofitable clients and ensuring demonstrable profit margins, before they decide to sell.
Advisers investing in technology that can demonstrate a transition to digital engagement with clients, along with meaningful efficiency gains, will be the ones that prosper. And unlike Bob, if they decide to exit the industry, can do so at a premium.