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Practice Valuations in a Pandemic Forte Asset Solutions
Landscape of the financial planning industry during a pandemic
Greatest amount of stress ever seen • Last 3 years industry in disruption with Royal Commission, Hayne report, Exit of banks. • Life Insurance Framework (LIF). • Loss of “grand-fathered revenue”.
• Increased costs – ASIC Fees, dealer fees, PI, compliance, education. • Education - PD points, FASEA, University qualifications. • Dealer Groups– forced exits, forced retention, brand degradation, compliance greater than legislation.
• Annual renewals – client value proposition changes. • Business re-engineering – pricing, tech stack, productivity impact, team management. • COVID 19 – clients needs greater, technology – cloud based, video conferencing – mass and individual communication.
• Oscillating markets – low yield, uncertain direction. • Recession –clients, family, business. • Mental Health.
Landscape of the financial planning industry during a pandemic
In a time where there is so much uncertainty, businesses that can showcase predictability and reliability are the ones that are generating a premium and in high demand. • Demand > Supply • Significant reduction in the supply of financial planning businesses for sale. • Large amount of opportunistic buyers in the market, however valuations are still holding strong at (2.5-2.8x). • Recent sale had 48 inquiries. • Demand is being created due to the increased cost in operation (PI, dealer fees, education, compliance), cheap finance, abundant capital and need for synergies.
• Supply is the lowest level ever seen by Forte in 17 years due to mistaken belief of depressed valuations, business reengineering, response to FASEA, dealer migration, client needs.
Landscape of the financial planning industry during a pandemic
• Organic vs Inorganic Growth • ASX200 down 16% (20/07) from all time highs. • Unemployment rate 7.4%. • Early withdrawals of Superannuation nears $30bn. • First recession in 29 years. • Where is growth going to come from? • Potential sellers need sufficient data on their businesses to bring to market. • Clients Age, Service Levels, Fees, FUM, locations, Financials. • Need to showcase how COVID-19 has impacted their business
Impact of COVID-19
• Number of clients who are SMSE’s? • How many of these have accessed Job Keeper? • How many clients have used early access to super? • How much Super FUM does this represent? • What has been the impact on FUM 1st and 2nd quarter calendar year 2020? • What has been the level of contact to clients since February 2020 – on a collective and individual basis? • What has been the client response? • How have the staff adapted to working from home? • Has there been any change to infrastructure or technology? • What changes have there been to client service or planned in the future – virtual meeting, video communication etc? • Will there be any changes to fixed costs – rent, staff etc?
Landscape of the financial planning industry during a pandemic
• Fear factor of 2024 degree qualification was offset by the extension to 2026 (Labor fighting for 2024). • Industry relevant degree 01/01/2026
• As of June 18th 2020, 10,250 advisers have sat the exam. 45% of the 22,600 advisers on ASIC’s FAR. • 86% of advisers who have sat the exam have passed.
• 3 month continuing professional development relief. • FASEA confirms the remaining 2020 sittings for the Adviser Exam will be held over 5 days in each of August, October and November.
• FASEA will offer further exams with multiple sitting days in 2021. Advisers have until 01/01/2022 to pass the Code of Ethics Exam.
Landscape of the financial planning industry during a pandemic
• Client Value Proposition / Fixed Fees / Annual re-engagement / Good compliance / Managed Accounts • Business engineering has become the industry focus
• Adviser exodus continues • 25/07/19: 1,750 advisers left the industry in the June Quarter of 2019 leaving a total of 25,470 - IFA • 05/02/2020: 4,378 advisers left the industry in 2019, 23,686 total – Adviser Ratings • 21/07/2020: 1,750 adviser leave in the first half of 2020, 21,913 total – Financialstandard
Approximately 21,900 advisers left
22% reduction since Jan 2019 Industry Fallout 2019 – Professional Planner
Trends in improving practice efficiency and reducing operation risk
Practice Efficiency
Reducing Risk
1.
MDA/SMA/IMA
1.
2.
Fixed fees
Multiple service relationships
3.
Outsourcing
2.
4.
Technology (video conferencing, cloudhosted document storage, marketing automation, digital signature tool)
Communication with clients
3.
Clear value proposition
4.
Annual compliance and reengagement
5.
Key person dependency
5.
Specific target market
6.
Integrated CRM (data management)
Key Value Drivers from the perspective of a buyer
1.
Practice Valuation
Pricing Model • Fixed Fees represent a stable cashflow that is highly desired in the current economic environment. • Market volatility puts % based revenue at risk.
Key Value Drivers from the perspective of a buyer
Practice Valuation
1.
Client Demographics • An ageing client base represents a mortality risk to prospective buyers. However this can be offset by providing aged care services or intergenerational advice.
2.
Location
3.
Profitability and Size • Trend towards EBIT methodologies, as buyers focus on ROI.
4.
Platform and Asset Management
5.
FUM
6.
Licensing
7.
Impact of COVID-19
12 Month Actual Offers and Sale Prices to July 2020
Revenue Type
Recurring Revenue
Financial Planning General
2 – 2.8 x (Large gap reflects the demand for quality)
Grandfathered Revenue
0 x
Financial Planning HNW
2.5 – 2.8 x
Financial Planning 35%+ of clients 70+
2-2.5 x
Large Financial Planning
5 – 6.5 x EBIT
Risk
2-2.5x (Substantially less demand)
C & D clients
2x
Corp Super not default funds
2 x
Corp Super default, member pay
1 – 2 x
Accounting with FP
1 x (Maintainable Earnings), 4 x EBIT
Mortgage
TBA (historically 2 – 2.5 x)
Trends in contract of sale
Averages have fallen • 5-6.5x EBIT • 2-2.8x Recurring Revenue • Longer timeframes. • 70/15/15 as oppose to 80/20. High focus on minimising client retention risk. • Cheaper Financing
Premium/Discount Factors
Premium
Discount
1.
Fixed Fee (stable CFs)
1.
Regional (low demand)
2.
Young client base
2.
Aged client base
3.
HNWs
3.
Low average FUM
4.
Target Market
4.
Low profitability
5.
Cultural Alignment
5.
Poor systems and process
6.
Negative or no growth
7.
Grandfathered Revenue
8.
Poor Compliance
Case Study A – Valuation During a Pandemic Reengineering a financial planning business
Business Profile
Adviser Forced To Re-engineer practice
136 Active Clients
FUM $315,000,000 $310,000,000 $305,000,000 $300,000,000 $295,000,000 $290,000,000 Current FUM
Old AFSL (pre 30/6/19)
$1.77m Recurring Revenue
High Touch Service
Structure
• No full-time staff only principal is full time. • 2x client services associates (part-time). • 2x Adviser Associates (part-time). • Paraplanning is outsourced. • Embraced technology • My Prosperity/ O365 / Egarda / KC / Mailchimp/ VOIP/ Ventra IP • Approaching capacity at 136 high-touch clients with current infrastructure. • New generation platform.
Client Demographics
Service Segmentation
Category
Criteria
Average Remuneration per Client per annum
A
High strategic needs, unlimited service with new SOA each year.
$30,994 pa
18
B
2-3 meetings per year. Medium needs.
$12,474 pa
84
C
1-2 meetings per year. Lower strategic needs.
$5,027 pa
34
Client No’s
Type
Client Fee Schedule and Basis
Basis
Upfronts
Establishment
Cost recovery
Plan
$2,000 to $15,000 for planning fee.
Ongoing Trail
Nil – all trail rebated to clients.
Service – (based on client requirement and strategic needs)
A – up to $50,000 B – up to $20,000 C – $5,000-$7,000
Financials
Key Strengths
• Fixed service fees and not asset-based fees ensuring revenue stability and no over exposure to top FUM clients. This is a significant consideration to value assessment. • Strong profitability ratio • EBIT / Gross Revenue = 70% • Management and reporting structures. • Excellent. Quickest turnaround of information that Forte has encountered.
Key Strengths
• Ahead of future legislative changes as recommended in the Royal Commission. • No grandfathered commissions • 100% Active client base with all SOAs produced in last 6 months. • Annual client engagement • Excellent age segmentation illustrates good cross section without overexposure to one particular sector. • 70+ makes up only 21.41% • Mortality Risk is further reduced by active intergenerational advice. • Excellent retention of staff through transitional period points to strong culture and team management. • Very good average FUM per client ($2.18m)
Recommendations & Observations Source: Business Health – Future Ready VIII – Insights in the Australian Advisory Profession
Key Person Risk
Profit Margins likely to fall with growth
Introduction of full time adviser
Asset Management
Platform/Product Packaging
0.6%
0.1%
Planner
Dealer Groups
0.6%
Client Total
1.3%
Managing relationships and risk through change
How did you manage your client relationships through this critical period? • Talk to your clients as much as possible! • I took the transition as an opportunity to start from scratch with clients. • You can use the transition as a chance to re-price / change your pricing methodology for your practice. • I have been inundated with clients referring friends and family. How do you minimise risk and produce an efficient outcome • Be sure about where you are going. • Communicate effectively with staff and clients. • Embrace technology. • Outsource where you can. • Don’t be complacent. • Back yourself.
Challenging the traditional value chain
Morgan Stanley – Research: Wealth Decoded June 2019
Asset Management
Challenging the traditional value chain
Platform/ Product Packaging
Dealer Groups
Planner
Client Total
Traditional ValueChain
40-80bps
50-70bps
40-55bps
45-60bps
180-220bps
Post FOFA Reform
40-60bps
40-60bps
15-35bps
50-60bps
160-180bps
Post RoyalCommission
20-60bps
15bps
40-50bps
50-70bps
160-180bps
Traditional Value Chain
Dealer GroupFees
Post FOFA Reform
Dealer Group Fees
Post Royal Commission
Dealer Group Fees
Directly from planner
5-10bps
Directly from planner
5-15bps
Dealer licensee services & Reg tech
10-15bps 15-25bps
Indirectly via platform rebates
20-40bps
10-20bps
Aggregation / Supply Chain Benefits Portfolio Construction / Asset Consulting
15-25bps
Total
40-55bps
Platforms for education, compliance and business support (no rebates) Total
Morgan Stanley – Research: Wealth Decoded June 2019
15-35bps
Total
40-50bps
• IMAP Milliman Managed Account FUM Census FY19 • FUM in managed accounts = $71.383bn • Growth of 15% (9.62bn) for FY18-FY19. • Expected Growth 40% for FY20-FY21
Managed Accounts
30 June 2019
Increase / Decrease from Dec 2018
SMA / MIS
$25.56bn
20.9% ($4.41bn)
MDA services
$29.24bn
10.3% ($2.72bn)
Other Services
$16.58
14.7% ($2.13bn)
• Growth of managed accounts and next-gen administration. • 09/07/2020: Netwealth FUA $31.5bn, 35% ($9.1bn) increase over FY2020 despite negative market impact of 3.8%. $3bn (110%) increase in managed account balance a record year.
Netwealth Managed Accounts - FUM growth $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
• Rise and use of index funds/ETFs.
Index Investing
• Active management has never been under so much scrutiny. • Fees 0.1-0.4% vs 0.8-1.2% • Exchange traded products industry surged to $60bn at the end of 2019 – MD of Van Eck Asia Pacific
Source: ASX, ETF Stream
Case Study B – Attacking the value chain Robo Advice meets Financial Planning
Established in August 2016, went ‘live’ with an offer in July 2017 – currently 333 accounts, $70m FUM.
Business Profile
Average FUM $212k+
Strong Fund Performance during COVID
Ethical Investment Tailoring
Transparent Fees and Investment
Onboarding Process
Case B
Robo Advice
Managed Fund
Fast online application with no paperwork
✓
✓
✓
Online Dashboard
✓
✓
X
Backed by major financial institutions
✓
✓
✓
Direct contact with people who manage your money
✓
X
X
Monthly performance reporting
✓
X
X
Complete ethical tailoring
✓
X
X
Complete transparency of your investments
✓
-
X
Direct local share investment
✓
-
X
Direct international shares investment
✓
-
X
0.8%1.0%
0.5%1.2%
0.7%-2.0%
Features
Features vs Other Investment Options
Total Fees (per annum)
Fund Comparison
June – 2020
12 months
Inception
Growth
-0.1%
6%
8.5%
Foundation
-0.5%
2.9%
6.4%
Accumulation
-0.3%
2.3%
5.0%
Income
-0.4%
2.5%
4.6%
Core International
-0.4%
12.5%
13.2%
Core Australia
2.65
-2.1%
4.7%
Key Strengths
• • • • • •
Cost advantage of using passive and active funds management 70 international quality stocks bought for $230 Can trade international equities at 0.15% Total management fee of .64% plus third- party platform fee Total transparency client sees every stock, bond using SMA Can create ethical screens • climate change/war/human rights/vices/animal rights/no Australian banks • Research of every asset held so client education and engagement high • Proven Management • Sit between Robo and Full Service – unique value proposition
The Key Differences
• • • • • •
Regular ‘Meet the Manager’ Seminars around Australia Monthly performance posts Weekly live podcasts Blog posts multiple times per week On-line client portal available 24x7 10-minute account creation process complete with Statement of Advice • Online ID / AML verification • Online risk profile with “safety triggers for manual reviews • Digital signatures
The future – Beyond 2026
• EY 2019 Global Wealth Research • growth of independent advisors to surge over next 3 years by 73% • 40% of Australians to switch wealth providers in next 3 years • Percentage of AUM and hourly support are currently most common payment methods, although fixed fee models are the most desired. • Superannuation • 2017: $2.3 trillion • 2027: $4.8trillion • $3 trillion multi generational wealth transfer • 71% of Aussie consumers nominated transparency a significant requirement • Preference for in-person or phone interactions down from 35% in 2016 to 22% in 2018 • 47% of Australian respondents prefer mobile apps, from 12% in 2016 • Australian respondents to use fintech to increase 53% in next 3 years.
The future – Beyond 2026
Restoration of Trust • Exit of Banks • Degree Qualified Advisers with experienced CEO’s/Chairpersons • Vigilant authorities • Removal of conflicts and improved transparency Better Businesses • Uncoupled to market influences • Clear pricing and value proposition • Profit per client • Lower platform/product fees • Aggregated buying co-operatives – dealer of the future? • Greater governance and compliance –individually licensed? • Better client experiences and outcomes.
The AdviceTech landscape
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