Adviser business values hold steady

Early concerns were that adviser business values would collapse due to the implementation of the new Financial Services Legislation Amendment Act.

Monday, May 31st 2021, 10:54AM 2 Comments

by Russell Hutchinson

It was suggested that if so many adviser businesses would be for sale, prices would inevitably fall.

This viewpoint has been reinforced by comparisons with the Australian market – there they have implemented very tough new educational requirements along with a new practising certification process.

There has been a huge fall in adviser numbers.

AMP’s decision to cut their buyer of last resort provision has also been well-publicised so insurance client bases are currently transacting at less than half the value they are here - somewhere between 1.5 and 2.5 times renewals.

That has not happened here. What might happen and what has happened have turned out to be different.

Fortunately, there are differences in our legal and regulatory regimes. Our educational requirements are more vocationally focused and exclude fewer people.

Fewer people are leaving – of course, there is still time for more to head for the exit, some may have transitional licences and do not intend to obtain a full licence.

But right now, fewer advisers are leaving than expected.

In fact, by one measure, Financial Advice Provider’s estimates of the number of advisers they will have in July are higher than the total number in the old regime.

We think that number will drop – but anything up to a 20% drop would not be meaningful in terms of either production or the value of their client bases. Why?

Because those books of business are typically small or are filled with older clients and so are already discounted in value.

In one sense, the Australian model is right. If you are seeking the sale of a tiny parcel of clients – say just $5000 to $15,000 of annual renewals – then the multiples will be like theirs.

But for bigger businesses, the values have been sustained or risen.

Upwards price pressure has also come about because of another aspect of the new law. As costs for each business have risen there is enormous value in being bigger.

Compliance costs are often fixed in nature or only increase slowly with volumes.

So, advisers are getting together to form larger businesses and those that are already large see an opportunity to leverage their scale.

So, there are buyers that are well-resourced with sufficient funding that they have no difficulty mopping up scores of small books.

Very low interest rates have contributed to asset price inflation in house prices, and equities are also contributing to upward price pressure as investors hunt for yield.

None of these conditions are necessarily here for good. We may find a lot of advisers head for the exit as they try for full licence status.

Interest rates may rise. Educational standards will almost certainly rise in the next few years.

But for now, I am happy we live in a New Zealand financial services environment – not the Australian one.

Tags: FSLAA Opinion Russell Hutchinson

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Comments from our readers

On 1 June 2021 at 12:56 pm Backstage said:
I would say we are on the cusp of values deteriorating. I really do not think it has hit yet and many advisers still think of yield and still hallucinate about what they consider some of their files are worth. My view is you now have an accountability and legal responsibility for every file you claim are clients you service. Why would i just buy for yield? The same liability i have for a $50 per month client i have for a $3,000 per month client. Where should my resources go now? I certainly would be very picky now when considering what i purchase. I would need to be sure i have the capacity to service each client as is required.
On 2 June 2021 at 1:43 pm JPHale said:
Thanks for the useful insights Russell. I think we're yet to see the full impact of the regulatory changes as many seem to be trucking along with BAU which may result in a few surprises very shortly.

Advisers seem to be trying to get it right, though there are some clear gaps in what I am seeing and this is likely to result in a few responses which may or may not impact valuations.

Those that are seeing out the two year period, which may find they have issues with that because the full licensing rules applied from 15 March 2021, before bailing may be in numbers significant enough for the rest not to be able to absorb them impacting price -ve.

Also, those advisers with the expectation of carrying on and finding it too hard, which there will be a number, will also look to vote with their feet, either out of the industry or under another business, this will have an impact too. Pice +ve or -ve on case by case.

I've already been surprised with a few exits I didn't expect just yet, and a couple that I would have thought would be long term. So it is anyone's guess at this point.

The providers have been saying they are closing hundreds of agencies, what they are is another guess too, as these could be historic crap that should have been tidied up long ago (which I know exists in what I have seen) or it may be those that have been fast asleep and are retiring too. Or it could be the bods that missed the message that there was a legislative change coming ;) Who knows.

What can be stated clearly; we have no idea what base valuations are going to do in the future.

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