The Averaging Effect

Over the last few years there have been significant changes to the way financial planning books are sold – given the changes in the industry, buyers are becoming more discerning than ever – afraid of buying someone else’s problems.

Recently, we have seen examples of the averaging effect of client books that stress the importance of tidy books.

One example has a financial planner with a reasonable book for a sole adviser with turnover around $450,000 p.a. who had a third of their book made up of clients with revenue less than $1,500 p.a. When the purchaser priced the book, they considered the profitability they could extract from the book, and then retrospectively calculated recurring revenue multiples to get to the same value. This looked like:

  • The top end of the book valued at high end multiples of 2.8 x recurring revenue
  • The middle section of the book, e.g. those clients with 2-3k who have potential for fee growth, and reasonable serviceability, valued at a slight discount – say a 2.4-2.5x
  • The bottom end of the book, was valued at just above 1 x revenue
  • The averaging impact of this, meant that the overall multiple applied to the book was just above a 2 x recurring revenue multiple.
  • The alternate offer for the same book was a good multiple on the top clients, and leaving all other clients behind, switching off revenues completely before the transition.

What this tells us is that the low end of the market, the clients that are ‘not profitable’ with servicing requirements is a detractor for most purchasers, and if they can avoid it they will.

So what does this mean for a potential vendor, with a few year lead time to a sale?

  • Review Client Fees – We’ve seen many an example of planners running re-pricing for clients. Reviewing the cost of servicing clients and having a minimum offer and fee. The media and the financial services industry have already told Australians that financial advice is expensive, and getting more so – there is more red tape than ever before. Most clients are willing to pay for the reassurance of a good adviser to support them, and those that have lost clients have more than made up for it with increased fees across other clients.

Ideally, this project would be completed and bedded down before a sales process commenced – allowing for at least a full cycle at new levels before sale and further disturbance (e.g. change in adviser) occurred.

  • Sell off Unprofitable Fees – There are solutions in the marketplace that will buy low client fees, particularly those with insurance revenues, and provide a low touch but compliant approach to service. These providers often pay a percentage of the revenue over a number of years, which protects them against the drop off, but provides an income stream that equates to a decent market multiple – albeit paid slowly.

By forward planning and acting on the unprofitable segment of your financial planning book, you’ll maximise the value of your business when it comes time to sell.

If you’d like to talk through your sale options book a free discovery call with us.

About the Author
Fiona Ettles , Hobart
Fiona is enthusiastic about informing and reassuring clients of their financial position, be it in regard to the value of their businesses, or their tax returns. She enjoys working with clients to understand their problems, consider solutions and implement plans to better their lives, whether this be in the short or long term.
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