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The market for adviser businesses

Strong buyer interest in adviser business in general, and specifically life insurance client bases, has been a growing feature of our market segment for the last twenty years.

Tuesday, April 9th 2019, 3:49PM 2 Comments

Russell Hutchinson

In spite of various hiccups – like downturns, and the introduction of the Financial Advisers Act, the market has been buoyant. Even demonstrably poor client bases could be sold for sums that were considered with some envy by, say, mortgage brokers or fire and general insurance businesses.

The passage of our new advice law raises standards and may push some marginal advisers out of the industry. There is a great debate about how many, and what kind of effect that may have on the market. It seems certain that more small books of clients will be available to buy. Some advisers that have worked part time in the industry – perhaps while they ‘try it out’, or as a side-line – may judge it better to leave than meet new standards. But will that depress prices?

In surveying the market for client bases significant differences are clear. A small regional town more than an hour’s drive from a city already tends to be priced down. A book with many clients aged over 55 also tends to be sold at a discount to the average. A deceased estate, untended for some time, likewise. Combine the factors and there are bargains.

Small books of business from part-timers – with perhaps 50 to 200 clients may become more common for a period between now and the commencement of the transition period to the new regime, for example, and perhaps with some continued flow during the transition period, and maybe another spike just before the end of transition. Being small these books don’t mop up much of the available capital – so I cannot see a wholesale collapse in values unless the numbers of advisers pushed out by the new law reaches so far up the adviser market that it is reaching those with client bases of more than 1000 or so. It could, but it seems unlikely.

The transaction cost of buying many small books means that a price decrease for them could still not impact sales of much larger books – which enjoy a reduced transaction cost as a proportion of the purchase price. Larger books are unlikely to follow such an easily identifiable pattern, too. Some advisers contemplating retirement may bring forward a planned exit, but if the market for client bases were substantial depressed, they have the resources to defer that sale with a number of strategies – hiring some of the less experienced advisers to allow them to retire from advice-giving while retaining their business is a short-term measure that could easily become long-term.

It is hard to identify the impacts of the new law directly. What you need to avoid is a combination of negative factors. While you can’t help your location much, or prevent a sudden health problem, you can take precautions that should reduce your risk of being pushed to sell at the worst time. You can conserve capital, improve efficiency, identify succession options, and obtain a transitional licence.

Tags: insurance Russell Hutchinson

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Comments from our readers

On 11 April 2019 at 10:20 am dcwhyte said:
Fair comments, Russell. But the major factor from a buyer's perspective is how compliant a vendor's book of business might be - or not as the case may be. Also, the review of remuneration structures and incentives currently requested of life companies by the FMA may impact vesting rights, residual commission levels, and consequently the multiples offered. All this adds up to uncertainty which does not make for rapid acquisition decisions.
On 12 April 2019 at 10:06 am Barry Read said:
Compliance of buying a book may or may not be a major factor. If you are buying an advice practice and adopting their systems and processes, yes compliance is an issue. If you are buying the servicing and renewal rights to financial products of clients, then the compliance by the previous adviser is much less of an issue, as the responsibility of advice stays with the previous adviser and you are only responsible once you engage the clients as their adviser. Also the timing of any potential revenue changes via regulation could mean that any impact is three plus years away. so depending on why you are buying a book and the funding model, this may not affect current values, but could do once they are known.

Values have many variables but at the end of the day it is a number both parties agree there is value. Comparisons and average multiples are interesting but may be of no value in some acquisition decisions.

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