Regulation fears for advice businesses' value

Insurers will have a role to play to help advisers if the Financial Advisers Act brings in extra compliance requirements for them, AIA's chief executive says.

Tuesday, June 21st 2016, 6:00AM

by Susan Edmunds

The Ministry of Business, Innovation and Employment is due to give its recommendations for the FAA to the Commerce Minister by the end of this month.

There are predictions that among the changes to be implemented are more obligations on advisers who are currently registered but not authorised. At the moment they do not have to have the same amount of paperwork as AFAs.

Nick Stewart, of advice firm Stewart Group, said an increase in paperwork and other regulatory requirements could potentially lead to a drop in business values for risk advisers. On average, risk businesses are usually valued at three-and-a-half to four times their annual income, compared to twice for investment advisers.

"Wealth management firms used to transact at higher multiples," Stewart said. "It could be partly due to regulation. It could be why there aren't so many risk books transacting at the moment. With regulation on the horizon if you are paying three-and-a-half to four times, if you have to prove you can service clients well you cannot make money paying that multiple so it could be going to change."

Natalie Cameron, chief executive of AIA, said insurers would probably have to step up.

"I would say that there is a role for the insurers to play in helping to support advisers through those changes. If those changes come in, AIA will look for ways to help reduce the admin burden and help provide training. We will always try to find ways to support the advisers who support us."

But Naomi Ballantyne, of Partners Life, was not convinced that insurance brokers would notice such a change.

She said people were willing to pay three-and-a-half to four times for a risk business because premium income would usually increase each year as premiums increased automatically. A buyer would break even on their purchase before four years in most cases, she said.

Anything they sold beyond that would be return on investment.

There was not the same potential for passive income growth in wealth management firms, nor the potential to sell more products or move clients to other providers. "It isn't the role of regulation that created that difference."

Advice risk does not transfer to the new owner of a firm if the book of clients is sold.

Tags: AIA Financial Advisers Act Partners Life