The financial planning sector is an extraordinary part of the wealth chain because it carries incredible value as a result of its distribution capabilities.
The dichotomy, however, is that the sector is trying very hard not to be seen as a distributor as it moves towards a self-regulated profession which many planners are increasingly passionate about. If this trend develops fully, it implies that the value for distribution should reduce and be replaced by EBIT from professional service fees. Welcome to the end of the wealth fairy tail… or is it?
Many vertically integrated businesses are still offering Buyer of Last resort [BOLR] schemes with valuations that are economic suicide for all but the seller. Take note of the words “last resort” as opposed to buyer and the issue becomes clearer. Some institutions are so obsessed that their value proposition is their sales force (sic) that they are prepared to risk shareholder money just to retain client registers. They pay more to retain than the market would to buy. Why? Because the clients are on old products that are legacy margin and if the clients move to today’s products the revenue model would plummet. Welcome to the challenge of running a large listed enterprise focussed on quality of advice and client best interests but charged with shareholder interest first and foremost. It’s a wonderful debate – shareholder vs customer interest first.
This week’s number one public rumour and it is just that, merely ‘a rumour’…. has an interesting slant in the light of structural changes taking place within the industry and BOLR is caught right in the middle. Apparently, one of the country’s largest wealth players notorious for BOLR’s has between 200-300 advisers in the queue because they’ve all woken up to the fact the BOLR is probably their only option given the change in education standards that will force many out of the industry.
This is a real game changer for shareholders and other stakeholders because we’ve never seen anything like this before and it’s a balance between retaining market share to rebuild, or start afresh and decimate the advice networks. Pay more than market but retain client registers seems an easy option but the real moral challenge thereafter is moving clients from old legacy products that are out of touch onto contemporary lower margin better solutions. One issue is the new owner of the advice is likely to be an employee model / or a new adviser buying a book back (at lower value paid for by shareholder losses) and both are unlikely to be tied to yesterday’s work practices.
The other issue to consider with the rumour is the balance sheet liability for the difference between market value and BOLR. One wonders whether share market analysts have done any homework on this issue – if it’s really imbalanced it could impact share valuations. Just picture it, 2-300 BOLR’s all being paid out over a 4 year period because the deadline date for exit is the scheduling of the education standards. What is the contingent liability and who really pays for the arbitrage between buyer and seller? Tricky stuff because time is not a friend and shareholders vs customer interests are uppermost.
As a bit of a sideshow the industry rags are making quite a bit of noise about the likely exodus of planners at the moment but much of the commentary is subjective and anecdotal without much analysis. It’s an important issue for the wealth industry to address because if the numbers are as high as forecast it will impact fund manager relationships, Dealer stability and for many, economic survival and a change of distribution patterns. No wonder the big managers are beefing up to go direct offering LIC’s ETMF’s and ETF’s …it’s all about offering services to the market with or without an adviser. In years to come (say four) the question is what will the number of AR’s be in the advice industry and where will they be based – employee or IFA or aligned? Each has advantages but if we move from say 24,000 AR’s to say 15,000 …. There will be losers. No wonder BOLR practice heads are queuing up to sell on 1990 valuations and retire early seems a great idea compared to working for a degree for four years while your business and clients need looking after….. then retire and get less than today’s offer. Take it and run? – You bet. No wonder the rumour is 2-300 advisers.
*Ian Knox is managing director of Paragem. The views expressed are his own. This column welcomes contributions. Contact: firstname.lastname@example.org