Why financial advisers are getting their practice valuations all wrong

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Financial advisers are failing to recognise the effect that FoFA will have on the value of their client book, and will struggle to sell their practice for anything like the sum they expect.

These are the thoughts of Max Franchitto, management advisor and business analyst at MGF Consulting Group, who has told Wealth Professional that many advisers are in for a shock.

He believes that buyers won’t be willing to offer anything like the adviser’s valuation of their own practice until they have proven that their clients have successfully opted into the fee for service model – and are paying their invoices on time.

“I was having this conversation this morning with an accountant who shares an office with a financial planner,” he said. “She said the first thing that accountants look at when they buy each other’s portfolios is how many billable clients have you got – how far behind are they in their payments? Have you got a book that’s more than 30 days in arrears, and how big is that amount?”

He added that when a buyer looks at a financial planning book – risk product trail commissions aside – they will be asking “am I going to be able to collect those invoices?”.

Buyers who are looking at financial planning practices that can’t prove that they have successfully transitioned to fee for service, as well as having a client base that pays their invoices, will bargain hard on the price, said Franchitto.

“As a buyer I’m going to be in the position to say, ‘sorry, given the structure of your business, and given that this is how it’s set up, I’m not going to pay you two and a half or three times the book. I’m only going to pay you one and a bit’,” he said.

“I advise a lot of vendors and purchasers, and that’s exactly how they're thinking.”

Transition period required

What this means, suggested Franchitto, is that advisers who are hoping to sell their practice may have to stay on and oversee the transition to the fee for service model before they’ll be able to sell their book at a reasonable price.

“I recently faced exactly that challenge with a vendor where the purchaser was willing to give them a bit of longevity to stay on,” he said.

In this case, said Franchitto, the vendor asked the adviser to stay on and help with the transition to fee for service as a condition of the sale:

“Stay with us and help us as you’re transitioning to retirement. We’ll buy your book and you can stay with us for a couple of years or so, you can help us transition the clients across and you can disappear quietly – and we will have maximised the loyalty and retention of the client base,” he explained.

He believes that this process of going through the “trauma” of transitioning to fee for service, and proving that your clients will pay their invoices, will take "at least one cycle".

“Clients are opting in or opting out now. There are a lot of advisers who have already bedded clients down. I was speaking to an adviser today who’s already gone through the trauma,” he said.

“I think he was saying in February next year it will be the end of his first year where everybody will have been invoiced once – and, so far so good, they’re all paying. Some slower than others, but they’re all paying.”

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  • Mel on 19/09/2012 4:24:26 PM

    Agree Paul. I have been FFS for many years, most of my clients pay flat fees from super or investment. There are increased costs to invoicing them and following up on invoices. The fee is the same, put I don't have to chase it.

  • Roger on 19/09/2012 3:07:46 PM

    Correct me if I'm wrong, but are not existing clients "grandfathered" to allow the planner to retain trail on these clients? This of course being of great benefit to clients that are considered "c" and "d" clients that really need financial advise and could not afford or maintain out of pocket invoicing.

  • Paul on 19/09/2012 11:06:40 AM

    Where in Fofa does it say you need to bill clients annually by invoice? Patent nonsense.

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