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Vol.25 No.33 | September 1, 2011 | $6.95 INC GST
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Buy-back contracts under scrutiny A bill in By Tim Stewart DESPITE moves in the industry to remove perceived conflicts of interest, questions still remain about ‘buyer of last resort’ (BOLR) contracts between dealer groups and their aligned planning practices. The buy-back provision was created to provide retirement security to planners, with the first BOLR contracts offered in the late 80s, according to Paragem managing director Ian Knox. Since then, dealer groups have moved to alter their BOLR contracts to combat the perception that they offer more than the market rate to practices that favour their products. “It’s been accepted by the [Financial Planning Association] and other entities that BOLR should be stopped,” Knox said. “How do you look after your clients’ best interests without acknowledging that you’re going to get more at retirement than would be commercially available in the market?” For his part, FPA chief executive Mark Rantall played down the suggestion that BOLR agreements were causing planners to behave unethically.
Ian Knox “I don’t think BOLR in itself is necessarily a conflict provided it is well disclosed to clients … What is important is the individual financial planner is a member of a professional association and adheres to its code,” Rantall said. Knox said his biggest disappointment was the leaders of the industry were undermining
the industry’s push towards professionalism by offering practices BOLRs above the market rate. “Anyone who is going out and paying advisers hundreds of millions of dollars above commercial values is undermining the advice profession,” Knox said. The BOLRs offered by different dealer groups vary from two times recurring revenue to a maximum of four times at AMP Financial Planning (AMPFP) for experienced planners, according to Forte Asset Solutions director Stephen Prendeville. “AMPFP is self-perpetuating. It’s a selfcontained business unit, and there’s this expectation that everyone who’s been there for 20 years will sell at four times,” Prendeville said. “People join with the knowledge of a BOLR, so if AMPFP were to shift that, it would pose a real business risk,” he added. Kenyon Partners principal Alan Kenyon said AMPFP could afford to pay above the market value for the practices of experienced advisers because it had a stable of younger Continued on page 3
Post-merger cashflow most important for merging practices By Chris Kennedy THE single most important factor to consider for financial planning practices looking at merging with or acquiring another business is demonstrating reliable future cashflow of the combined business, as lenders place greater emphasis on what are the risks associated with an acquisition. Kenyon Partners managing director Alan Kenyon said this is a factor that it is not readily understood throughout the industry. Lenders are most interested in what the business will look like once the new practice has been incorporated, as well as how the acquisition will be funded, what
Alan Kenyon the purchaser’s liability is, and most importantly, what the free cashflow will be after financing costs, he said. Lenders would previously be
happy to look at the annual figures of the businesses involved and be satisfied that everything was ok, and while the criteria for lending to practices may not have changed, lenders’ ability to get a more frequent handle on how a business is tracking has changed, he said. But the principal of Hunt’s Group consultancy Anthony Hunt believed there would be an increasing trend for lenders to focus on the EBIT [earnings before interest and tax] of the business to be acquired. “It’s taken years to get specialist teams in banks to understand the principle of revenue multiple, but they understand earnings and are prepared to lend on an earnings
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basis,” he said. NAB’s national manager of financial planner banking Shane Kirsch said NAB assesses the strength of the cashflow and the ability of the combined business to repay debt. “It’s what can be produced, what the banks would be looking to partner with – that’s what the assessment has to be focused on,” he said. “You could have a business today that might be operating successfully, then acquires another one – it’s got to prove it can manage a larger business,” he said. “We also look at the cultural fit
two parts By Mike Taylor THE financial planning industry may have to wait longer than expected to see the entire legislative package flowing from the Government’s Future of Financial Advice (FOFA) changes, with the Assistant Treasurer, Bill Shorten, now expected to deliver the draft bill in two tranches. Shorten told last month’s Financial Services Council (FSC) annual conference on the Gold Coast that the draft bill would be made public in early September, but industry sources have told Money Management the two-tranche approach will see key elements delivered at a later date. Money Management has also been told that in 11th hour negotiations with key stakeholders, Shorten has sought to use a partial removal of the ban on risk commissions inside superannuation as a bargaining chip to extract commitments from financial planning group negotiators. Shorten told the FSC conference that the Government – having listened to the Financial Planning Association and the FSC – was prepared to revisit the proposed total ban on risk commissions inside superannuation and perhaps allow commissions to be applied with respect to individually advised risk products. However, in negotiations which have followed his statement to the FSC conference, the minister is understood to have indicated the Government will only deliver on the concession if the planning groups fall into line. Shorten’s attitude and the reality that a ban on risk commissions inside superannuation would serve to exacerbate Australia’s longstanding
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