Recent M&A activity, what is driving it and what it means
FSLAA on the one hand and low interest rates on the other is driving a K-shaped market for client bases. FSLAA implementation will push down values for client bases at the bottom end of the market while leaving the market for medium and large sized client bases firmly in the grip of wider market fundamentals.
Friday, March 11th 2022, 11:21AM
First FSLAA impacts – we believe current estimates overstate the number of advisers in the new regime. Estimates of the number of FAs in the new regime are based on application data by FAPs.
As each transitional license application was made the FAP was required to estimate the number of FAs it intends to employ. It has to be said, fairly enough that this is the best formal estimate we have.
I would use the sum of these estimates as well, for a first attempt at the expected number of advisers in the new regime.
However, compliance advisers report that when faced with the question, if a FAP was unsure of the number, they were advised to enter a higher figure. For example – if you previously had a dozen RFAs contracted to the business, and you were unsure if you would bring all of them across you probably still put that number down as 12. In practice we think the requirement to have all FAs connected to FAPs by July 15 will probably see lower numbers reported as more leave.
What impact will that have on the market?
It will be modest.
Consider, for example, even if we terminate the least productive 1,000 advisers. The typical client base within the group comprised less than $5,000 a year in renewal income.
If the total renewal revenue was $5 million, at even a high multiple (say 4.5x) the value is $22.5m – but these books will not attract that multiple – they will more than likely transact at about 2x. A total of only about $10 million.
That could easily be absorbed by just one or two of the businesses that we know acquire books regularly.
On the other hand, consider the hunt for yield and the need to find a safe harbour for investment money
There are investment dollars looking for a home. Interest rates must rise a long way before they challenge the value of investing in a well-run financial services business.
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