The accounting industry is littered with examples of people who have bought books of fees, and after a short period of time, find that the book of fees has walked off somewhere else. There are some good examples of this, whereby vendors decide shortly after selling their book that they want back into the business themselves – and the fees come back to them.

So you need to know who in the vendor’s business actually has these relationships. Quite often, it’s not actually the vendor, but a key employee or number of employees. If they’re coming into your business when you buy that book, you need to ascertain whether they’re going to be happy and whether they are going to be a good cultural fit. If they’re the ones that own those relationships, you can pay vendor A but employee B will walk off with that whole book of fees.

So in understanding the actual assets you are buying, the real key to value is in those relationships. This is the most important thing to understand in conducting due diligence of professional practices.

From an acquisitions perspective, some of the businesses we see are niche – they are specialised and very focused on what they do, while others we see are large, multidisciplined and corporatised. Both of these can be great quality businesses to sell. Unfortunately, however, there are other businesses in the marketplace where much of the intellectual knowledge and capability of the business is tied up in the relationships that the principal or principals have with their client base.

These are important considerations in assessing the realistic value of a business. Rather than just looking at an EBIT number, acquirers would also be looking at how a business would stand or fall with the exit of the practice principal or principals. This is incredibly important in understanding the value that a potential acquirer will place on your business.

A second consideration in getting a realistic and honest price for your practice is understanding who would buy you, and why. What would your business and client base bring to a potential acquirer? You need to understand how your business might fit with a potential acquirer and their future business plans. However, in many instances, there are disappointing examples of sellers who are far too focused on their future than perhaps the future of the buyer. And that to me is a major mistake.

On the other hand, if you are looking to pass the reins of your business on through succession planning, this is an opportunity for people who know and understand your business to take it forward. This too brings with it some challenges. Just as the mistakes of the father are visited upon the son, so too are the mistakes of a previous practice principal visited upon the person within the practice who succeeds them. This person has the challenge of evolving the culture, evolving the systems and then evolving the client base. These challenges are not insignificant, and they should be factored in by any potential successors within a practice.

There are a range of possible growth strategies, other than selling for growth, that can be considered to achieve growth objectives. These could be:

1. Hire new staff – a paraplanner, a senior advisor, a marketer with business development skills.
2.  Sell ‘C’ and ‘D’ clients and realise some equity. Reduce client numbers to a manageable level, focus on more profitable clients, and work to attract more profitable new clients.
3. Seek a merger with another similar business that could provide a wider range of services.
4. Align the business with an aggregator/consolidator that aspires to list in the medium-term to achieve higher valuation benefits.
5. Implement a succession plan to sell part of the business to a senior adviser. This realises some return on the investment, reduces key person risk and assists with adviser retention.
6. Consider selling a majority stake in the business to a larger, faster-growing, aligned business with which you share the future vision. This enables the vendor to participate in the total growth of the combined business.

If a combination of some of the above are properly aligned and structured – 1+1 could equal 3 or even 5!

As a result a financial advice business buying a book of clients, an institution or licensee wanting to grow their dealer groups through acquisition, or a bank lending money against the cash flows of practices wanting to make an acquisition are placing a stronger focus on value.

We are now seeing a downward trend in terms of the multiples paid, as well as a shift towards multiples of ongoing profit streams and maintainable earnings. With these trends, risk is now being priced into the acquisition.

Lower quality books and businesses, with less documentation, poorer client relationships or lack of evidence around strength of client relationships, are attracting much lower multiples from potential acquirers.

The key here is keeping your business as simple as possible, so a prospective buyer understands what they are buying. In a nutshell: the less moving parts the better.

Your most likely buyer is going to be the one whose business best aligns with your platform and administration strategy, whether that is at an institutional level, or a practice that has a similar business model to yours.

So my key message is to keep it simple, find a potential seller who looks just like you (or work to towards making your business look like them), then sell or consider alternative approaches to your succession.

The first noticeable one is that there is a bit of an arms race going on in the acquisition of planning practices, with institutions actively looking to boost their distribution channels.

But arms races are difficult things, because if you don’t participate, you lose. And if you do participate, you don’t necessarily win. Because institutions are quite serious about acquisitions, this is making it a bit difficult for some of the independent firms to compete because of some of the prices the institutions are paying for practices.

For businesses like ours, that actually own large planning firms, retaining practices through this period is quite a challenge because you’ve also got a lot of institutional competition for these acquisitions.

Another trend in the practice acquisition space is that the availability of debt funding has shrunk in some ways. There is less availability to funding than there was previously. This means that the institutions and wealth management companies are able to come in and offer an alternative to bank funding in terms of doing deals to acquire financial planning firms. So, we’re seeing quite a bit of activity there leading up to FoFA. I expect to see a lot more between now and when FoFA kicks in. So there is no doubt that things have picked up in the acquisition space.

It’s an unusual situation we find ourselves in – which is ironic because in some ways, reform has brought this on. There are a number of advisers who have decided to exit the industry rather than go through another round of reform. I’ve heard some commentators say up to 30 per cent will leave, but I don’t think it’s going to be quite that high. Planners are resilient and they’ve been through change before. But this time it’s different because they’re older, with many owners approaching retirement. Some of these planners are questioning whether they want to go through more change.

These trends are forcing just about every player to actually come up with a succession planning solution. The ultimate question for financial planners to answer is “What’s the exit strategy for the business?” Increasingly, the question is now being asked of the institutions (particularly the licensees/dealer groups) in how they’re going to offer practices a succession planning solution.

Those who don’t have a succession planning solution will lose the arms race. Those who do will survive it.

1. Your network. Colleagues, your dealer group, BDMs and PDMs and other people you come into contact with regularly who are active in the market are all well placed to advise you on opportunities. The more people you talk to, the more likely you are to come across interesting opportunities. Ensure your network is aware that you’re looking to buy and enlist their help in finding potential sellers.

2. Your strategic alliance partners. It could very well be possible that one of your strategic alliance partners would be aware of planners interested in selling some or all of their practice. For example, life insurance brokers you may work with, solicitors and accounting practices would fall into this category.

3. Professional intermediaries and business brokers. A growing trend is in the use of independent, external professionals to locate potential sellers. A buyer engages the services of a professional who identifies the buyer’s geographic target and desired characteristics. The intermediary then acts as the buyer’s agent to contact the firms directly.
This approach can be very effective, and is more discreet than a direct approach. The intermediary generally charges a fee contingent on a successful acquisition. In addition, intermediaries can offer additional consulting services to the buyer. The services may include valuation, deal documentation and negotiation. The intermediary should be the buyer’s advocate, acting in your best interests.

4. Other sources. A good adviser knows their competition. Is there an older adviser nearby who has no obvious successor? Is there a smaller firm who might be interested in a larger platform? Industry conferences and forums increasingly feature sessions on transition, valuation and succession. Network at these functions and make it known you are an interested buyer.

Identifying suitable acquisition targets in today’s competitive market can be challenging, and there may be some avenues you haven’t considered to source potential prospects. To make sure you get the best result, enlist all potential lead sources to help you find the right firm.

We’ve welcomed the fact that the industry has moved away from commissions such as product commissions. We still think that there is some refinement to be done around how this is currently addressed in FoFA. The government has backed down from the proposal to ban commissions on risk insurance in superannuation, so they’ve scaled that ban on commissions back to the barest minimum. But ultimately the key with any remuneration arrangement is to remove conflicts and to make sure that it is transparent.

In terms of acting in the client’s best interest, I believe that financial advisers wholeheartedly support the concept of a best interest duty across the industry. The way the government has currently drafted it still leaves a lot of uncertainty in terms of how it would ultimately be applied. In the legislation there ought to be some very clear steps that an adviser has to go through in order to comply with the best interest duty requirements, so there is room to improve the current definition of the best interest duty.

On opt-in, what the government is proposing to do is to force people to re-sign contracts with their advisers on a regular basis. If a client takes a view that they’re paying too much or they’re not getting a good enough service, of course they should be able to either discontinue that relationship and go to another adviser – or stop taking advice altogether – and that’s what the current government is proposing to do with FoFA as it currently stands. We would get rid of the opt-in provision which we think unnecessarily increases red tape and costs for both businesses and for consumers, and would reduce choice and diversity in the marketplace.

So remuneration arrangements need to be fully transparent, conflicts need to be removed, advisers need to have a very clear understanding of what is expected of the requirement to put the client’s interests ahead of their own, and there needs to be minimal red tape which will only increase the cost of doing business for advisers.

We need to have a sensible look at the regulatory framework as it currently applies and look for opportunities to help advisers get on with their business, which is helping people with their financial health and wellbeing. And ultimately the best person to make a judgment on whether or not they’re getting value from the advice relationship is the client – not the government.

Clients come to me to discuss a potential purchase and the proposition before them. I’ve seen cases where sellers tout 10 times recurring revenues for a sale. My first questions to a client in such a case are: what are you going to make out of this and where’s the real profit in it for you?

There is a process to work through in establishing the answers to these questions. Firstly, lock down what you think the future revenues are going to be, then determine what it will cost you to generate those revenues. In these steps, there is a lot of work in analysing the seller’s clients, the services provided to them and forecasting future revenue streams. There is just as much work on the other side of the profit/loss statement to determine what it’s really going to cost you to drive the business to generate those revenues.

When you go through that process, the outcome is what we call future maintainable profits or future maintainable EBIT. This paints a much more realistic picture of what a practice is worth. When I say to a client, “you should be valuing this potential purchase at 3 or 4 times that profit” sometimes they are surprised because the seller is spruiking their practice for 5 or 10 times that profit.

In my world, a good financial planning practice should be trading on a multiple of between 3 to 4, and that’s after adequate remuneration has been allowed for the principals that are working in the practice.

Having owned and run my own financial planning businesses, I knew that selling my business was an emotional issue as well as a financial one, and required support and professional assistance in more than one area, as well as the time and ability to assess all prospective buyers and then select the right one.

Choosing to establish a business as sellers advocate, knowing this would provide sellers with the best result in every area of their sale – financial, support, professional advice, cultural fit, long term health of the business, staff morale and payment terms – was an easy decision.

Having discussed the pros and cons with sellers of their previous attempts to sell their business, and gaining feedback of their experience working with us, their experiences have been summarised below.

Succession planning is of critical importance to IFAs. Many IFAs are approaching retirement, with many looking at exit strategies for both themselves and their business. Another reason succession planning is becoming more of an issue for IFAs is regulation.

Regulation, particularly in the form of FoFA and MySuper, are big issues for IFAs. While FoFA is designed to eliminate conflicts of interest and make advice more accessible, I’m seeing a number of IFA practices question whether they should stay in business or exit because of the complexities and potential costs of complying with FoFA. This hardly meets the objective of increasing access to advice.
It is often institutions which purchase IFA businesses, which potentially increases vertical integration and the concentration of ownership of financial planning in Australia. You would have to question whether or not this would eliminate conflicts of interest or make advice more accessible.

While the MySuper reforms are yet to play out fully for financial planners, there are definitely new forms of competition for IFAs compared to five or ten years ago. MySuper brings on a new form of competition in that superannuation will come with advice at one end of the spectrum, while at the other there has been a significant increase in the number of SMSFs.
Financial planners have to try to embrace these trends and come up with solutions for both mass-market consumers who are most likely in industry super funds, as well as higher net worth individuals with SMSFs. These competitors are in some ways threatening the standard territory of financial planners. There are, however, progressive firms that are adapting, by offering simple solutions at one end and self managed solutions at the other.

There are also some interesting trends in the independent dealer group space. With the new regulatory framework, the independent, non-institutionally owned licensees are going to find survival quite tough. In the past, they’ve relied on subsidisation to enable them to be profitable and to provide their services. However, under FoFA, these subsidies will be eliminated. As a result, independent, medium sized licensees have got a choice to make: downsize to become more profitable in a new world, or look to an institution to partner with or buy them.

We are already seeing a number of trends along these lines, with the downsizing of groups, the starting of boutiques and mid-size dealer groups selling to institutions.

So there are a number of interesting trends happening within the independent space. Regulation is playing an increasingly important role in both IFAs and independent dealer groups, and professionals within both these spaces need to move with the times in order to survive.

However, there are a number of things buyers should keep an eye out for in the due diligence process of any potential transaction. I always like to use the housing analogy, because people can understand what they need to do to sell and buy a house.

So if you’re buying a house, you’ve got to know about the suburb and area that a house is in, you would want to get a building inspection done, and you would want to ask some critical questions of the incumbent owners.

In these critical questions lie the holy trinity of due diligence for potential practice acquirers. These questions are: What does the commission statement say? What does the bank account say? And what does the download from the product system say? The answers to these questions all have to match up, so that you can genuinely assess what it is you’re potentially buying.

Using the housing analogy again, this is akin to a surveyor confirming the size of the block of land, and the building inspector confirming what’s actually in the paperwork you’re presented with. You would want to make sure the incumbent owners own the title and that everything in the files check out with the building inspection.

So if you’re buying a house, you would suss it all out. Why would you do anything differently for a business you are buying?

In the financial planning space, there have been two major drivers of forensic accounting services when it comes to business valuations. The first was the GFC, which really prompted people to focus back on what the true drivers of value are. At the end of the day, this really comes down to risk and return. The GFC has really shone the light on risk, and this is a key driver in business valuation trends. As potential acquirers that there is more risk in the marketplace, they’re not prepared to pay as much.

Regulatory change is also another potential risk for those in acquisition mode. The financial planning industry has for years basically sat on annuity streams by way of trailing and other commissions. This led to a situation where people would just simply sell these annuity streams on multiples of what these revenues were, because the perceived risk attached to these revenue streams was pretty minimal.

However, with Future of Financial Advice reforms coming into play, you can’t be certain that you’re going to maintain that continuing annuity flow. So there is more risk attached to those revenues, and this is changing the focus from ‘rule of thumb’ valuations, based on a multiple of revenue, to valuing businesses on what their true profitability is and what their true returns are likely to be.

It’s important to begin the integration process early to ensure the best outcome – a smooth and efficient transition.

An integration project needs to be managed with a well-defined project plan. The project approach to integrating your two businesses helps set realistic targets and time frames and greatly increases your chances of success during and after the integration.

The first step to establishing this integration project is to create your integration strategy as part of your overall business model and objectives.
The second step is to define your requirements. Being specific and detailed is essential to manage the expectations of all stakeholders (your new and existing clients, your new and existing employees, your new and existing suppliers i.e. dealer group, product providers). .

When integrating your business, it’s important to re-define roles and responsibilities even when the outward changes may appear to be minimal. Accountabilities shift in the context of the integrated business and it provides a great opportunity to re-energise some if not all of the stakeholders.

You’re ready to integrate your acquired business when you can answer ‘yes’ to 6 questions:

1. Do all of your stakeholders (especially your new clients) know what is happening and understand how the integration will affect them?

2. Will your service levels meet your clients’ needs and will they be appropriately priced?

3. Will your business processes meet service standards that are consistent and effective?

4. Do you have the right business processes and tools to deliver advice and service efficiently?

5. Do you have the right information to manage your clients and run your business?

6. Do you have adequate controls and processes to ensure your business remains compliant?

Reducing the level of this dependency, I believe should be a strategic imperative for many practices.

While the depth of relationship is a true business asset and key person dependencies can never be eliminated, there are some practical steps that can be taken to manage and mitigate this business risk. Here are a few suggestions:

1. Ensure you introduce all of your key staff to your clients – if your team is one of your greatest assets, make sure they are not your practice’s best kept secret.

2. Continually promote your support team. Publish their names and photos on your website, arm them with business cards, have them speak at your client seminars and develop a “who’s who in the zoo” contact flyer that you can include in your client induction material.

3. Make sure you are not the problem. Be disciplined and immediately delegate all administration calls/queries to the appropriate member of your team. Don’t get involved unless there is a problem and delegate the $20 an hour tasks to someone else – your time is better invested elsewhere.

4. Wherever possible conduct all of your client facing appointments in your premises. Make a point of involving your key support staff in these meetings and take clients and prospects on a “guided tour” of your office to showcase the capacity of your team.

5. Be mindful of the terminology you use – refer to your business, your practice, your firm and your team, always as “we” and never “I”.

6. Proactively manage any personnel changes. While it is a fact of life that people move on, don’t let the first your clients hear about it be when they ring and ask to speak to someone who is no longer with you. Make sure you put a plan in place to proactively manage the transfer of client relationships.

7. Find reasons for your key support staff to regularly speak with your clients. Supplement your face-to-face contact with a proactive client communication program that includes all of the key members of your team. All communication/contact does not have to come from you.

8. Channel all initial client enquiries through your support team. Encourage them not to put calls straight through to you and always ask “can I help” or “may I ask what it was regarding”?

9. While reducing principal dependency delivers obvious upside for your practice, in all your discussions with your clients, reinforce the benefits for them – continually explain why they are better off dealing with your team and not solely you.

10. Don’t forget your referral partners and centres of influence. While you will need to handle these relationships a little differently, it is just as important that your alliance partners are comfortable and confident dealing with anyone in your practice.

And finally, perhaps the last word should go to the numbers themselves – while it is now generally acknowledged that principal-dependent businesses will have a lower capital value, our HealthCheck data shows that those practices that have an effective succession plan (which of course includes identifying and addressing any key person dependencies) deliver 106% more profit per principal than those who don’t.

A return well worth the investment of your time and effort.

For example, a recent survey conducted by consulting firm Leap of Faith found that 75 per cent of financial planning clients would prefer an alternate way of paying fees to that of the current industry standard. One third said they would prefer a success fee based on performance and taxation savings, while 29 per cent would opt for a flat fee and 13 per cent an hourly rate. Only 12 per cent were happy with a percentage-based fee on FUM.

In contrast, ASIC’s recent shadow shopper survey of financial advisers found that 78 per cent of advisers were paid through product commissions or fees that were based on a percentage of the client‘s assets or investments under advice.

Unsurprisingly, where advice fees were contingent on a product recommendation, advice often appeared to be geared towards recommending or selling financial products, at the expense of optimal strategic advice for clients.

Success-based fees are a sensible and reasonable approach as far as clients are concerned, and forms of success-based fee payment exist in many other industries. Of course, this ‘sing for your supper’ model does place more responsibility upon advisers if they are to make a nice living. Financial planners should keep these kind of stats in mind in considering what model they might adopt in a fee-for-service post-FoFA world.

Specifically, ASIC noted that too much poor advice provided to its shadow shoppers was overly product-focused and not strategic enough to help clients develop a realistic and achievable plan for their retirement. Furthermore, ASIC saw examples of conflicted remuneration structures, such as product commissions and percentage asset-based fees, impacting on the advice and recommendations, and on the quality of advice.

A recent Roy Morgan Research report, Superannuation and Wealth Management in Australia, also found that Australians continue to remain confused about planner independence when it comes to selecting financial products when it comes to the “Big 6” financial planning groups.

Advisers are important gatekeepers who play a key role in helping clients plan and manage their finances, and ASIC highlighted the importance of the industry removing conflicts of interest and in improving overall professional standards to ensure that their client’s trust is not misplaced (something that will be interesting to watch with associations with ‘approved-by-AISC’ codes of conduct being exempt from opt-in under FoFA).

However, with increased consolidation underway in the financial planning practice sector and the big players in the industry looking to consolidate and build their revenues, the pressure is on non-independent planning practices more than ever before. It’s easy for ASIC to come out and say ‘remove conflicts of interest’, but the reality of this is easier said than done.

While financial planners who are members of the FPA and potentially the AFA may be breathing a collective sigh of relief, this raises significant questions about industry associations’ need and ability to police their members. ASIC has recently signalled it is taking a harder line on compliance in a number of areas, and soft compliance won’t cut it as far as ASIC is concerned in the future. And it still hasn’t been announced whether or not ASIC will require some form of opt-in under compliance with professional codes of conduct (which will make this whole exercise redundant).

In any case, the associations will have their hands more than full dedicating adequate resources to overseeing and enforcing their beefed-up codes of conduct. It will be interesting to see how this plays out in reality. Self-regulation comes with its own set of pitfalls, and it will be important for the associations to take note of these if they are to be successful in stepping up to the plate and taking the financial advice industry to a level that ASIC will be happy with.

With regards to practice valuations, the deferral of FoFA’s implementation date to 1 July 2013 will be a contributing factor in buyers’ considerations. The key determinate to value is still supply and demand, and historical equilibrium is expected to be maintained here.

Overall. what we are seeing are better businesses as all principals have been forced to review their business models, with a growing focus on profit or use of EBIT valuations for full business sales.

There is a concern with FoFA that any grandfathering of opt-in will cease if there is a licensee change. This may have valuation impacts as buyers will look to acquire within their dealerships and therefore a reduced market for vendors to sell rather than going to the whole market. Additionally if the business is taken to open market a discount may be applied to inactive clients.

Financial planning businesses have been considered recession-proof as they are beneficiaries of ETPs requiring advice, but if a stagnation of business activity continues we will continue to see demand be maintained due to the lack of organic growth and the need for scale.

As all market participants know, it is inherently difficult to time the market and sell before you have mentally walked away from the business. If principles are “hanging in there” waiting for improvement it is more than likely they will experience value loss due to client and/or staff defection/attrition or compliance failure.

I would recommend practice principals conduct a personal inventory and assess if they have the energy to grow the business and if so stay, but if the aspiration is to maintain the status quo and wait it out, it is probably best to sell and go now.

See here for the full list of Forte Asset Solutions’ 2011 market commentary as well as recommendations for improving the value of your practice.

The average practice owner in Australia is likely to be in their early 60s, and looking to either sell up and move on soon, or transition out of the practice gradually through other means over the coming years. These practice principals have put a lot of time and effort into building their business and client base over the years, and it’s fair to expect a reasonable return when owners do move on.

Pre-GFC, it would have been reasonable to expect multiples of 3x and above for a good practice. However, times have changed, and banks and larger firms are much tougher in recent times when it comes to negotiations and offerings. Anecdotal evidence would suggest that the some principals’ perceptions of what their practices are worth are out of step with reality. It’s a harder, tougher and more competitive market.

While valuations and methods for valuation may change, the fundamental basics of practice value do not. Creating and communicating value is a cornerstone of practice value. It is worth taking the time to get up to speed on ways to improve the value you deliver to clients, and either engage new clients or re-engage inactive clients with a strong unique value proposition.
This is what No More Practice is about. In the end, you and your practice can only benefit through better value on all fronts.

• Firstly and perhaps most important, you have to be a good quality business that is uniquely positioned if you’re going to be attractive to a buyer;
• Second, you need mechanisms in place to attract new clients to the table and retain them;
• Third, you need systems and processes in place to run an efficient business;
• Fourth, you have to be able to attract quality staff to help build and sustain your business; and
• Fifth, you don’t present any risk to a potential buyer. In other words, you know what you’re doing and you provide quality advice.

In Count’s case, the reason Commonwealth Bank bought us is because they knew we were a quality business and also had a unique positioning. If you look like everyone else then you have to do something special to stand out.

When I started out, for example, I was a banker, and I knew I could never compete against the sales skills of life agents and others. I believed accountants should be involved in this business, so that’s where I focused my attention and I developed that side of the business. In doing this, we carved out a niche where there was less competition.

Count is a quality business. We’ve built a reputation in the market for delivering quality advice with good quality people. The bank can buy many financial planners, but they obviously wanted a business that was accounting-based. There are not too many businesses like Count. As a professional advice-based business, we also faced less risk as a result of regulatory uncertainty around FoFA.

We weren’t intending to sell to anyone when Commonwealth Bank came along. I’ve had plenty of people ask me if I would like to sell the business, but no-one had made an offer post listing.

The directors considered the Commonwealth Bank offer, bearing in mind economic and regulatory uncertainty, competition, changes in management in recent years as well as other factors and decided it was worth recommending to the shareholders – who voted more than 99 percent in favour of the acquisition. This speaks for itself.

Lastly, I would say you need patience. I’ve seen people come and go in this business over the years, because ‘it was all too hard’. You need patience and perseverance in this game. It takes time to gain a reputation and build and develop a quality business.

2. Volume-based payments
Whether volume-based payments are deemed to be conflicted revenue or not and whether they will be able to be received in the future directly by the practice or not, they must be considered at risk. Any practice receiving volume based payments need to reduce their dependency on this revenue stream and if your clients are not aware of the subsidisation of your service offer because of the existence of the volume override, they need to be. The client needs to understand and accept that if volume based payments are removed then they may be asked to pay more for the same service.

3. Service proposition
This brings into question the perceived value for service that you currently present to your clients and what that value proposition should look like in the future. Apart from the change from commission based to fee based charges, the “opt-in” requirement under FoFA will require licensees to firstly think through their approach to providing advice and then look at documenting that in a way that clearly articulates their service offering to the client. Those licensees that do not have a clearly defined service offering which all clients participate in will receive a lower valuation.

4. Service proposition
Under opt-in, the licensee is required to advise the client of the services that they received during the previous 12 months, but it is often the intangible services that clients tend to value the most. Clearly each licensee will need to develop a process for extracting this information so that the client can be reminded of the range of valuable services provided. Any business with strong processes, particularly for retaining clients, will be valued more highly.

5. Add value to the service offering
High value practices in the current environment, with little new investment other than cash, are focusing on alternative areas to add value. We have seen the movement of many practices and dealer groups for greater participation along the value chain. This is moving from purely advice to administration, portfolio creation and research. This is being enabled by the new technology of IMAs, MDAs and SMAs and the ability to outsource to specialists whilst still reducing costs to the client but increasing revenue participation.

6. Re-evaluate personal risk business One area that has seen a repricing upwards is personal risk. Risk practices demand a premium of 3.5 times or greater. There are a number of reasons for this, including the robust nature of the revenue stream, that it is not subject to market movements and it appears at least for the moment to be free of legislative risk (the exception being corporate superannuation).

7. Re-evaluate corporate superannuation
Corporate superannuation revenue has collapsed since FOFA announcements and there is little seller or buyer interest. However there has been significant work done in this area and those practices that specialised in this area have moved from commission to fee-for-service on a member basis and in most cases have experienced enhanced revenue streams. As a result of result of addressing their corporate superannuation remuneration model a practice is likely to experience a 100 per cent increase in valuations on this revenue stream by moving to fee-for-service.

8. Service and client segmentation
The value relationship is normally evident when service segmentation is in place, where multi-service packages are offered and are clearly defined by offer and pricing. Greater knowledge of client demographics and the ability to articulate the quality of the client base and the better the ability to mine your electronic Client Management System the better. Any investment in this area will normally bring great dividends.

9. Focus on profitability
Profitable businesses are being awarded higher multiples of recurring revenue and if or when there is the removal of volume overrides we may see greater use of EBIT valuations than ever before. There needs to be a focus on profitability and to maintain current recurring revenue valuations in the average business you need to be operating at above 35 per cent EBIT to gross revenue to achieve pricing convergence (3 times recurring revenue = 6 times adjusted EBIT).

10. Generate new business
Premiums are being paid for practices that are generating new business, which are a minority in the current environment but some are actually growing against significant head winds. Those that are growing are doing so because of their value proposition gaining client and referral acceptance, especially from new accounting relationships. Practice principles need to think of how they grew their business in the early days and get back to business development activities.

See here for the full list of Forte Asset Solutions’ 10 recommendations for improving and maintaining your practice value under FoFA.

On average, new business venue contributes about 30 per cent to gross venues – about the same number as profit margins. As a result, very few practices have been able to return to achieving those healthy pre-GFC profit margins.

Given this, acquisitions have become a highly attractive way of adding good revenue to both the top and bottom lines. So one of the trends we have observed is that those businesses which are not writing much new business are acquiring to improve primarily their top line.

Another trend we have observed is that some financial planning firms are bundling up their C&D clients and selling them off. There are a number of motives for this, and one of the main ones is FoFA readiness.

There are other financial planning businesses who are actively acquiring these books of business, which can be another good source of revenue. Given that there is an expectation that grandfathering will be favourable, acquiring businesses can see such moves as quite a valuable acquisition.

Valuations being placed on financial planning businesses have been impacted not just by the general malaise in the world’s financial markets but also by the uncertain future shape and structure of the financial planning industry.

But savvy investors relish the opportunity to buy assets, be they stocks or bonds or privately owned businesses such as financial planning practices, when values are low and the future seems uncertain. So, how does one take advantage of the current difficult climate?

Raising money for expansion in the current climate should be easier than it is. Most equity investors look to what the immediate returns will be and most debt investors (lenders) want more security than normal. This is despite the obvious truism that it is much better to invest at the bottom of the market than the top. People are people. Many studies have shown that while people are both greedy and risk averse, the latter usually outweighs the former in investment decisions.

So, to expand, practice owners should be looking to take on debt rather than equity if possible, with the added bonus of comparatively low interest rates. The time to diversify their risk was in the good times. Now is the time to concentrate the risk – that is, take on more risk. Often, of course, this is a personal and/or family decision.

Selling a business in the current climate, particularly in the uncertain world of financial planning, is similarly, if not more, difficult. Practice owners need to be patient and offer a consistent and credible message to potential buyers. Ideally, they will have drawn up a list of buyers two or three years ahead of when they would like the transaction to take place, leaving a further one or two years in order to provide a work-out period.

Those who know most about the industry are more likely to invest when the future is uncertain, so other financial planning groups, the big aggregators and current senior staff are the most likely buyers at present. Because it is more difficult to borrow currently, vendor finance has greater value than at other times.

With the three financial media companies I have founded and subsequently sold during the past 25 years, one went public during the ‘dotcom’ boom, one became a trade sale to an international publisher (of Money Management) and one became a leveraged management buyout. I found in each of these businesses that it was easier – and a lot more fun – starting the business than selling it.

The potential challenges that the Future of Financial Advice (FoFA) reforms present financial planners with have been well documented. More recently, it was noted that the number of accountants with financial advice qualifications could more than double under proposed FoFA reforms, which would allow accountants to provide advice on setting up self-managed superannuation funds.

In a recent Parliamentary Joint Committee (PJC) hearing into FoFA, it was estimated that up to 10,000 accountants may seek financial advice qualifications over the next few years as a result of the reforms. The planned removal of the accountants’ exemption is just one example of increased pressure on financial planners as a result of FoFA.

A recent CoreData whitepaper into this issue also highlighted the fact that financial planners may be squeezed out of the industry as a result of increased competition from not only accountants, but also stockbrokers and super funds. It noted that the client advisory landscape is much more fluid now, with a number of professions all laying claim to providing financial advice.

However, there is also opportunity for financial planners in the above. The whitepaper predicted an increase in partnership type models that leverage the best of the financial planning and accounting professions. From a collaborative perspective, the two professions are highly complementary, and such tie-ups may be beneficial to planners as trust is generally high between clients and accountants.

While evolution may be hard for some financial advisers, who may choose to ‘ship out’ rather than ‘shape up’, FoFA does present the financial planning profession with a number of opportunities to run more efficient, collaborative practices with a strong focus on value.

Get your business model right. This is the first and most important point for financial planners looking to grow and potentially sell their business in the future. We have a changing regulatory and market environment, so there are number of important factors to consider in this.

I have previously talked about the importance of the operation running as a business and not as a sales organisation. The challenge going forward is to provide associated services that provide a more comprehensive business and sustainable growth model. This leads me to my next point.

Staffing. It is important to give some consideration to the right staffing model for your business. Some guys run their businesses together with their wife, and sit around thinking they are going to successfully sell their business. But it takes more than that.

Financial planners can take a leaf out of the pages of accounting firms and legal practices, which charge staff out to clients at a certain rate. Under FoFA you are going to have to consider similar options, so think carefully about staffing plans and how you can leverage staff most effectively.

Happy clients. This is vital for any financial planning business looking for a potential buyer. If you can identify that your business is not only going to retain clients – but grow them – then it’s going to be worth more money.
If you are selling your business, it’s a good idea to hold a client function and help transition clients through the process and understand that they are going to continue to be looked after.

Understand what numbers are of value. When a potential buyer comes along, most financial planning businesses generally point to their trail book and say, ‘I’m worth X amount based on my trail and this is how much I have under management.’ I see this all the time, but this is not the future.

The future value of a practice will be determined more by EBIT than funds under management. As the industry continues to change and as more practices add further business services, it will be reflected in business valuation models, and not just funds under management.

A 2010 Association of Financial Advisers (AFA) whitepaper examined this (dis)trust issue. It found that specialist doctors are the most trusted among those who give professional advice, who received a rating of 8 out of 10. Financial advisers were ranked a trust rating of 7.5 out of 10 by their clients, however, consumers who do not use the services of an adviser only gave them a rating of 4.5 out of 10.

This low level of trust in financial advisers can be put down to a number of reasons. The negative publicity surrounding high profile collapses of financial planning businesses such as Storm Financial have unfortunately tarred the image of financial planners across the board. Financial planners behaving badly is one of the main reasons that Minister Bill Shorten has introduced the Future of Financial Advice (FoFA) reforms.

While most planners do act responsibly and ethically on behalf of both their profession and clients, Australians continue to remain confused about planner independence when it comes to selecting financial products when it comes to the “Big 6” financial planning groups.

A recent Roy Morgan Research report, Superannuation and Wealth Management in Australia, found that advisers from these groups continue to show an overwhelming preference for their own products when advising clients. Roy Morgan has also found that just over a quarter of consumers rate financial planners as very high or high when it comes to ethics and honesty.

Financial advisers in the bigger financial planning groups are in a potentially difficult situation – and potential conflicts of interest are something that must be addressed if the profession is to improve its trust standing in the eyes of Australian consumers.

Their feedback on potential acquisitions may be ‘The files will need to be all updated ‘, ‘the systems are not the best ‘, ‘you won’t be able to do that post FoFA ‘, ‘we don’t want any of the staff‘, and on and on it goes.

Needless to say these same people are still in the market looking for the elusive ‘bargain’. These approaches are much more appropriate in manufacturing or product businesses but certainly don’t cut it in professional services businesses which are based on relationships and trust. How do you put a price or a discount on integrity?

In my experience the two key elements that matter in a sale are:

Cultural fit. Do the buyer and seller have the same approach to client service, fees, value proposition, and product or service offering, such as self-managed superannuation, direct equities etc.?
Business opportunity. If I were to buy this business what opportunities will it provide? Scale benefits, added services i.e. accounting, risk, mortgages. Does it provide me with additional skilled people, sources of prospects and other opportunities?

If you get these two key elements right, the buyer and seller will find a middle ground and agree on a realistic price and sale terms. If, as a buyer, you think you’ve pushed the sale price down you might have just bought a whole host of poorly serviced, disenchanted clients.

There is no easy way to value the time and cost to add a new client, retaining them as satisfied clients over a number of years. However, there are agreed methodologies and strategies for arriving at a fair market price for a business. There are no real ‘bargains to be had’ when you are buying a professional services business that relies on ongoing client relationships.

There are some key elements to getting this right. First, it is important to have the appropriate debt financing mechanism in place, for example the right level of borrowings, under the right terms and repayment conditions, interest only for a period and then Principle & interest repayments. The next step is the more difficult one – Implementing a considered growth strategy.

Using debt financing to fund the growth is the first step. Combining this with a well thought out succession plan can enable the recruitment of the ‘right calibre’ of personnel to assist with driving your growth plans. Even more importantly, recruiting the right people will provide the means of repaying the debt and building a succession plan by adding equity partners who actually contribute to the growth of the business, and using their ‘buy in’, as a means of debt repayment. The Best of Both worlds!

In the case of the sale of a ‘book of non required clients‘, whilst ensuring legal agreements are correct and other issues are addressed, all of this pales into insignificance unless three key things happen first and foremost. They are:

1. Preparation. Providing the potential acquirer with accurate and detailed information about the clients being sold.
2. Marketing. Ensuring the business is positioned to attract the ‘right buyer‘ for the clients being sold and create a ‘level playing field’.
3. Negotiations. Only enter into negotiations with the prospective buyer/s that you know intuitively (among other things) is right for your clients.

This will give you the best chance of completing a transaction in a timely manner with the best chance of success.

Another related issue facing financial planners is increased competition. There are direct competitors, as well as competition from industry funds and the banks.

Competition for both business and talented staff is very strong. We are seeing certain companies offering strong incentives for people to move, however, I think this sets a very dangerous precedent. I don’t see that changing, and I think it is confronting everyone in the industry. How do you deal with a competitor approaching one of your good planners, who has been offered an extra $100,000 more, to work for a big company? So there are a number of challenges facing the financial planning industry.

Planners have to sit down and look at where the industry is going, talk to other people and have a think about how they can structure their business in order to tap into other areas of revenue. Whether this is in charging fees to clients, or looking at additional services such as real estate or technology, I would advise planners to look into other areas that can help you grow both your revenue and client base at the same time. If you employ advisers, look at ways to encourage them to stay and not be tempted to go elsewhere.

FoFA is around the corner, so you have to make sure everything is set up for compliance. But you also need to spend some time working out your business model to make sure that the revenue is going to be taken care as well.

Alan Kenyon posted a really useful blog on 9 November which summarised the role and key benefits of using a Term Sheet or Heads of Agreement in a transaction (link here). I see many terms sheets (good and bad) in my advisory role and agree with Alan that a well considered pre-contractual summary of the key deal terms is a terrific way to ensure that “everyone is on the same page” before a binding commitment is made. This said, care must be exercised to understand which terms are actually binding and to ensure that the key terms agreed ‘in principle’ make their way into the substantive sale contract precisely in the form you expect.

A term sheet (or ‘heads of agreement’ or ‘memorandum of understanding’) is technically an agreement to contract and may or may not be binding upon the parties. However, even when non-binding, it can be a useful tool to sharpen the focus of negotiating parties, to obtain early consensus on critical issues and to establish ground rules for due diligence and the negotiations to follow.

This blog builds on the issues raised by Alan and examines the benefits and practical applications of term sheets as well as some pitfalls to avoid.

Use and application

Once the emotional commitment to the transaction is made, it can still take weeks or months for the necessary paperwork to be drafted and finalised. For this reason, a case a no-fuss document setting out the core terms of the transaction can flush out any significant issues early in the process, before a party has committed significant time and money on due diligence or negotiating full blown agreements with a party that has irreconcilable commercial expectations.

Importantly, a term sheet is not a substitute for the contract proper. Rather, it should be viewed as a foot in the door – an agreement to contract – which is used to outline the core commercial terms and will confirm the conditions on which parties will access and use information and deal with each other during the investigation and negotiation process.

These core terms will serve as the basis upon which the lawyers draft the definitive sale agreement. If the parties can’t agree on these core terms at the pre-contract stage, it is likely that parties will end negotiations there, before wasting further time and resources.

Exclusivity

A term sheet may also include a term preventing the seller from negotiating with another potential buyer during the negotiation period. This restriction gives the buyer time to complete due diligence and negotiate the agreement without having to worry that a competing purchaser will steal the deal away from it. From a seller’s point of view, while an exclusivity clause can be a necessary evil, the exclusivity period should be as short as possible, so that it can start discussions with another purchaser quickly if negotiations with the proposed purchaser stall.

Confidentiality

If a confidentiality agreement has not already been entered into, a term sheet usually will include provisions dealing with the disclosure, use and return of confidential information. Access to this information (especially client details) should also be covered.

Binding or non binding?

In a term sheet, it is common for the parties to stipulate that some, but not all terms are intended to be binding. For example, if the parties have agreed to an exclusive negotiating period, that term will be confirmed as binding on the parties, even though other terms (such as the proposed commercial terms) are “subject to contract” and are not binding. Accordingly, an “agreement status” clause is usually included at the start of the agreement. This clause will identify exactly which clauses are intended to be binding and will make it clear that all other clauses will not be binding.

Top tips

• Where possible, include all “deal-breaker” issues to establish consensus on key commercial terms.
• An agreement to contract or term sheet can include binding terms which provide the parties with a secure framework within which they can commence negotiations and complete due diligence.
• Be clear which clauses are intended to be binding and state that fact.
• Merely identifying a clause as being enforceable, however, does not necessarily make it so – if the clause leaves something that is important or central to the contract to be agreed between the parties later, then it is likely not to be enforceable.
• Keep it brief – consider costs and time – don’t try to squeeze too much in, or you might as well skip this stage and proceed directly to preparing and negotiating the definitive agreement.
• Set a time limit by which time the parties are required to execute formal documentation.
• Good brokers or experienced lawyers will have templates to guide you on what to consider including (see Alan’s blog) and, importantly, which terms should be binding on the parties.

Clients aged under 30; those with less than $50,000 to invest; and those who had been with their adviser for less than two years were the least happy financial planning clients, according to the Lifeplan Funds Management/International Centre of Financial Services (ICFS) survey of 410 investors.

Communication and expectation management are vital for financial planners in successfully building and establishing relationships with their younger client base. This is all the more important during times of heightened market volatility – a hallmark of the past couple of years.

While advisers can’t change the performance of financial markets, they can influence how their clients view their own technical ability, trust and reliability. Younger clients with less life and investment experience may have unrealistic expectations around what their financial adviser can deliver. So in creating a financial plan for younger clients, it is critical to clarify exactly what you can (and can’t) do for them.

The research suggested that advisers could do more to recognise and respond to the concerns of younger investors, and relate to them proactively, despite their dissatisfaction with markets.

Perceptions of trust and reliability are affected by regularity of contact with clients, openness and transparency, and whether advisers do what they say they will do for clients. All of these things can be managed and enhanced by advisers – and they go a long way to improving the perceived value that any client derives from financial advice.

Socialware, a US social media consulting/software provider for financial advisers, conducted a survey last year and found that more than four out of five advisers were using social media for business purposes.

Using social media is one thing, but deriving business benefit from it is another. The same survey found that almost a third of advisers using social media for business have been able to cultivate referrals, while just over a third have generated new prospects – with many of these prospects converting to new clients.

Integrating social networks into overall sales, marketing, and client retention plans of financial advice firms is something that needs to be done with care. Understanding the demographics of your client base is key to this plan, as it is likely that clients in the earlier stages of building their wealth are more likely to be social media savvy than those approaching/in retirement.

Social media’s potential value to advisers is growing. As Socialware noted in its research, it provides a direct and inexpensive way to connect, build trust with and inform a large number of customers. However, wading into the social media waters needs to be done in a way that will add genuine value for your practice.

Here, we speak with Murray McKinley, Director of McKinley Plowman & Associates, a leading Western Australian financial services firm comprising Certified Practising Accountants, financial planners and finance brokers, about how 90 per cent of its new clients are generated through in-house referrals.

Q. What are the common elements of a good referral system?
A. We identify the right clients within our business, whether they be from our practices in wages and salary tax, business services, mortgage broking or financial planning. We also use good prospecting systems and tools on our client database (for example, demographic lists of clients who may require, TTR, SMSF or risk advice).

We build rapport with accountants and give feedback on work undertaken for clients. We ask clients to tell the referral source how well we have looked after them to develop relationships with the referral source.

Q. How do you go about selecting clients that will assist with referrals?
A. We have built our business through word of mouth client referrals. It is important to tell clients that you are looking for more work and ask if they have friends and family that could benefit from your services. Our strongest advocates have selected us; we foster this relationship with simple thank you’s and feedback.

Q. What is the best way of connecting with children of existing clients through intergenerational advice?
A. We start with parents adding children to their trauma policies as kids cover, and when they come off kids cover trauma at age 17, we move them to adult policies with level premiums.

Also, we set up managed fund saving scheme for children, developing the relationship further. Being accountants, we normally get the kids’ tax returns when they start work, and this develops our relationship further.

Q. Where do advisers fall down when it comes to referrals?
A common mistake is that advisers don’t have a dialog with accountants. Our culture is that of cross-referral. By doing this, our clients benefit most from our multidiscipline practice. Today 90 per cent of our new clients are generated in-house referrals; five years ago 80 per cent of our new financial planning clients came from external sources.

Q. What role does feedback to referral source play?
A. We operate a referrers’ lunch every month and invite all our accountants, mortgage brokers and financial advisers who have client contact to lunch. We treat our professionals in our practice like an external referral source.

At lunch we discuss recent referral and how clients benefited from this referral, we present case studies on ideal clients and communicate value proposition to build on our strategic alliance between accountants, financial advisers and mortgage brokers.

Q. Any last words of advice?
We spend a lot of time with network marketing groups such as Enterprise, BNI and Real Logic. We work closely with our dealer group, Count Wealth Accounts and our Count BDM. They understand accountants and have assisted with much material in generating internal referrals from our Accountants.

For more information, have a look at Zurich Financial Services’ article on growing the value of your practice the easy way.

However, this is the beginning of the most important part of the journey, not the end of the journey.

There is much to do, but the first and most important step is to document the key points of the deal to which both buyer and seller have agreed. This is a Term Sheet, or a Heads of Agreement, and may be subject to the purchaser obtaining finance and/or completing their due diligence.

It serves to document the key points that have been agreed at this stage, and avoids having protracted and difficult negotiations later at the contract stage. At contract stage lawyers are obviously involved and the parties have lost their maximum opportunity to influence the outcome.

In my experience the best time to obtain agreement to the many issues involved in a transaction is when both parties are in direct dialogue at the ‘offer and acceptance’ stage.

What should a Term Sheet or Heads of Agreement contain?

The following is not an exhaustive list but touches on the key items that should be contained in a Term Sheet or Heads of Agreement:

• Correct information related to the seller and buyer: company/trust, registered office, ABN/ACN, address and beneficial owners.
• What is actually being sold? i.e. shares in a company, units in a trust, or the assets of the business or book of clients. Vendors need to have received their own tax advice as to what is in their best interests from a tax perspective regarding the sale of shares/units or the assets BEFORE offering the business for sale.
• Price and terms agreed, and the basis of the calculation of the purchase price. If there are any retention payments, the conditions and criteria around payment of any deferred component.
• Specific details regarding other assets being included in the sale, such as furniture, fittings, computers, office leases. In addition, if there are staff involved, are they going to move with the business and on what basis?
• Dates upon which due diligence will be completed, dates upon which approval of finance is required, as well as a proposed settlement date.
• Details of the vendors transition arrangements need to be included, both in terms of time and if there is any ongoing role after transition, the remuneration involved, if any.

Top Tip

This part of the transaction is time consuming, can be frustrating and an emotional roller coaster. It needs to be project managed rigorously. If it becomes too draining and drags on, everyone suffers ‘deal fatigue’ and the goodwill built over the ‘courting‘ stage diminishes very quickly. This is a prime time for deals to fall over, despite the fact that most of the hard work has already been done.

Without an increase in the superannuation guarantee, Mark Rantall, CEO of the FPA, noted that Australians will need to extend their working life to be able to retire on an adequate income, or will have to rely on the age pension. By 2047, ten years after maturation of the superannuation guarantee system, 75 per cent of the population will still be on some form of the age pension.

Richard Klipin, CEO of the AFA, also weighed in on the issue and noted that in lifting the Superannuation Guarantee Australians should be better prepared for retirement and relieve what had the potential to become a crippling tax burden for taxpayers.

However, as Minister for Financial Services and Superannuation, Bill Shorten, has noted many times in talking up the Future of Financial Advice reforms, only one in five Australians use the services of a financial planner. An increase in the Superannuation Guarantee means that Australians will have larger superannuation account balances – and this represents a prime opportunity for financial planners to deliver real value for their clients and assist them with the very real and pressing need to adequately prepare for retirement.

Furthermore, financial advisers who successfully reengineered their businesses to turn a profit had fully embraced a fee-for-service model, according to the research.

There has been a lot of resistance from the financial planning community about a move away from commission-based business models towards fee-for-service under the Federal Government’s Future of Financial Advice (FOFA) reforms.
Even though FOFA is just around the corner, many financial planning businesses are still operating on a commission basis. A recent ASIC report, for example, found that the 20 largest licensees (representing around 70 per cent of the country’s advisers) still relied heavily on commissions. In fact, they earned about 90 per cent commissions and rebates from product providers, while only 10 per cent was made up of client fees and neutral product payments.

It is human nature to resist change, but if the Wealth Insights research is to believed, fee-for-service is a pretty attractive incentive to change. However, it would seem that the financial planning industry has a long way to go in embracing the fee-for-service model – and not just for the purposes of compliance – but for the sake of the bottom line.

Our judging panel this year was a great mix – Steve Davison was back from series 1, and continued to provide insight and energy as the deal unfolded. Financial Wisdom’s Mark Ballantyne was a new starter, and his pragmatic advice mixed with down-to-earth tips and tricks was a voice of reason. Our wildcard judge, Greg Bright, the founder of magazines such as Investor Weekly, Investor Daily, Investment Magazine and Professional Planner was our version of Kyle Sandilands. To say he called a spade a spade was an understatement. I know you will enjoy his commentary as the deals unfold.

No More Practice 2 really has created some great outcomes for the stars of the show. It is absolute proof that this kind of content can drive business outcomes.

I look forward to hearing your feedback as the series unfolds. And of course, if you would like to be a part of future series, drop us a line for the site.

Here is my Top 10 ways NOT to do it – hopefully this will help you avoid some of the most common pitfalls that practice owners encounter with this process.

The Top 10 – things NOT to do!

1. Make vague and unspecific promises to your senior staff that “one day all of this will be yours”.
2. Develop selective memory loss when your staff remind you of those promises.
3. Don’t give them a firm timeframe for equity ownership.  In this way, you can string them along for a few more years whilst you strip out every dollar of profit to fund your lifestyle needs.
4. Set them some super-aggressive KPIs or other aspirational performance targets for equity ownership.  The challenge will be good for them.
5. When they get close to achieving those targets, simply shift the goal posts.  They will get over it eventually.
6. Whinge and whine about how your senior staff are good technicians but are unable to help you, the “rainmaker”, to grow the business.  Why is it that, like leeches, they can only feed off the carcass that you kill?  At the same time, ensure that they are given no encouragement or training to get out there and build the practice.  No-one gave you a “leg up”, why should they get one?
7. Ensure that your own process of slowing down, taking it easy, and playing more golf starts before you have locked in your senior people with equity.  After all, you have worked hard and deserve a few years on the “gravy train” before your ownership is diluted.
8. Don’t bother getting your senior staff to sign employment contracts with restraint of trade obligations.  They’re not worth the paper they are written on.
9. With a sense of secrecy verging on the paranoid, jealousy guard from your senior staff the P&L, balance sheet, budgets and other financial information of the business.  It’s your business, not theirs.  They won’t need to understand any of this stuff until they become shareholders.
10. Only let your staff invest once they threaten to leave.  At that point, charge them the same high multiple of recurring revenue that you were persuaded to pay in 2006.

You might smile, but many of these Top 10 are pretty close to the truth of how some financial planning business owners think, feel and behave.

With concerning regularity, this leads to senior staff departures and a feeding frenzy for the lawyers with the subsequent nasty letters, legal proceedings, and “carve up” of the client base.

How to do it better

The better approach is, of course, to plan thoroughly and transparently for your exit, and involve your senior people as part of that process.  Your planning process needs to start on an emotional level, and will ideally commence a couple of years before you transition.

Some suggestions to help you get started are as follows:

• Seek some corporate structuring advice.  It is crucial that you understand, at an early stage, the tax and asset protection ramifications of your succession plan and whether there may be a preferable way to go.  One option might be to restructure the business as a first step, before you transition.
• Consider all options.  Whilst you may believe that selling equity to your senior team is the best way to go, you should also give thought to other options such as selling the entire business or client register to a third party, merging, or growing the business with a view to exiting for a higher price in a few years’ time.  A discussion with a corporate adviser or your dealer group would be a good place to start.
• Give thought to various different models for transitioning to your staff (for example sweat equity, debt funding, vendor terms, etc), workshop the upsides and downsides of each of these models, and form a clear and considered view on your preferred approach before discussing with your staff.
• If your staff do not yet have the skills, experience, business acumen or financial knowledge to take an ownership role in the business, start up-skilling them now so that this will not be such a big “leap” when the time comes.

Originally a talented school teacher, Dad made his career change to the financial planning industry in his mid-thirties.  How I smile when I recall that one of the main things that attracted him to this new career was that he needed no qualifications whatsoever to get started!  He finished work as a teacher on the Friday, did a weekend residential course, and by Monday morning he was out walking the streets, knocking on doors and selling insurance.  How things have changed…..

There was also not much of an APL back in those days - Dad had just one product to sell, and by all accounts he was very good at selling it!

From those humble beginnings, my father grew a large and profitable financial planning business which he ultimately sold out to his co-owner.  This was the first corporate transaction that I had witnessed in my life.  Seeing Dad successfully grow and sell his business had a profound influence on my career choice as a corporate lawyer.  And, the way in which he built assets outside the business and protected our family with insurances gave me an enormous appreciation and respect for the value of sound financial advice.

As a corporate lawyer, I now help financial planners and their clients with all aspects of business succession planning, including preparing for sale, corporate restructures, mergers and acquisitions, management buy-outs, and inter-generational transition.

Working with your clients on business succession planning

Through many years spent working with financial planners, one thing that struck me some time ago is how well placed you guys are to take a key role in helping your clients with business succession planning.

In the post-FoFA world, just as you purport to “own” the estate planning space, your next frontier as a profession should be to stake your claim as facilitators of business succession planning processes for your clients.

Private and family-owned businesses are the largest sector of the Australian economy, and the baby boomers who own those businesses started turning 65 this year.  The demographers are in heated agreement that we are staring down the barrel of the largest transition of private wealth that Australia has ever seen.  So, the need and opportunity for you guys to get on board and assist your clients with this transition is compelling.

Your role as co-ordinator

Just think of what you, the financial planner, bring to the table.  Business succession planning is all about projecting forward and goal setting, and above all other professionals you are the masters of that.  Add to this a broad knowledge of finance, budgeting, tax, corporate structures, insurance and asset protection, and you are looking at a potent combination of skills.

Acting as the co-ordinator of your client’s business succession process, you the financial planner can then build your networks by working closely with your client’s accountant and through introducing specialist lawyers, tax advisers, and other necessary professionals to assist.  The “hub and spokes” model in action!

Talk about succession and the opportunities will follow

By regularly talking to your clients about their business succession goals, just think of the benefits that will flow in terms of client retention, relationship building, and engaging with the next generation sons as your business owner clients approach retirement.  And of course, the opportunities for ownership protection insurance, key man insurance, and building non-business assets will just naturally follow.

And, when your client ultimately sells, there will then be the sale proceeds to invest.  How exciting is that?!!

So, get out there and start having meaningful discussions with your clients about their business and ownership succession goals.  Who knows where those discussions may lead….

The draft legislation must be measured against the twin objectives of access for consumers to quality advice and the removal of conflicts of interest. On both counts, the FoFA draft legislation has failed.

FoFA uses a heavy-handed approach to force change without a shred of independent research, without any Treasury modeling or rigour and with no clear evidence as to the impact and consequences for consumers, advisers and the industry.

The government’s use of Rice Warner Research, commissioned by the Industry Super Network (ISN), which indicated that the cost of implementing opt-in was in the vicinity of $11 per client, is a blatant demonstration of the government’s bias.

The inclusion of the ISN research and the exclusion of all other valid research on the topic of opt-in is flabbergasting and quite simply wrong. The minister in this regard is not acting in the public interest, but in the interest of industry super funds. Research from the advice market has opt-in costing $100-250 per client with cost imposts at ever level of the advice chain – adviser, licensee and product provider.

Opt-in will drive up costs for consumers, entangle them in red tape and reduce their access to advice.

With the late arrival of the draft legislation and the key date of 1/7/2012 still in place, it is critical that issues are resolved as soon as possible or that the implementation date is deferred.

The well-being of Australian consumers is at stake – that is the focus of the AFA’s position. We are looking forward to debating the draft legislation with all key stakeholders. We will also continue to encourage our members to “maintain the rage” with their local MPs across the country.

Like all matters to do with the mind, it seems, happiness is a very complex thing. Neuroscience – including its permutations in psychiatry – is helping to explain how the brain actually works, to the extent that we now know that a good proportion of our inclination to be happy rather than sad is actually genetic.

So, off the back of all this new knowledge and numerous erstwhile academic studies, what are we to make of the recent white paper from the Association of Financial Advisers which found that people with financial advisers are “happier, richer and more purposeful”?

The easy answer is to say ‘not much’ but the survey on which the paper is based should not be condemned outright. Even though the results are pretty much meaningless, any endeavour by the financial advice industry to try to understand clients a little better is worthwhile.

The AFA paper was based on a survey in May this year of 1,054 consumer respondents to a (much larger) sample by the research firm CoreData. But here are the two main problems with survey-based studies about cognitive functions and behaviours:

• they are subject to big distortions in the reporting of the information, and
• they tend to be either incorrectly presented or presented in a manner which is easily misinterpreted.

Many studies have shown, for instance, that if you ask people what makes them happy, they will most often say their children, holidays and spouses, in varying orders. Interestingly, spouses normally rank higher on the list for men than women.
However, in studies which have involved tracking the respondents’ moods more closely, by getting them to wear a beeper which sounds several times and day and after which they immediately record what they are doing and how happy they feel, the results are quite different. In these studies the most likely things to make people happy are reading and watching movies, which are activities where the respondents are more enmeshed in other people’s lives than their own. Children, holidays and, dare I say it, spouses, are actually stressful.

The other problem, which is probably a bigger one, is that surveys report correlations between factors which may or may not be causal. Are people who are happier than average more likely to seek out financial advice or do financial advisers make people feel happier? Instinctively, you’d probably think it’s a bit of both.

In the book ‘The Happy Economist – Happiness for the Hard-Headed’ by Ross Gittins, the economics editor of the ‘Sydney Morning Herald’, the results of numerous studies are sourced showing that money does indeed make people happier. But only up to a point. Once a certain threshold is reached, the marginal utility from each additional dollar diminishes quickly. After that point any extra degree of happiness is most likely to be gained from one’s relative wealth compared with neighbours and peers rather than absolute wealth.

So, if you get a big pay rise and decide to buy a long-wanted Porsche, your level of happiness will jump for a time. Then, two factors intercede. One is called ‘adaption’, whereby you get used to the new expensive toy and discover that it is not all you hoped it would be. You have to be more careful where you park, for one thing, and then there’s the cost of maintenance. The other is to do with relativities. If your neighbour buys a Porsche shortly after you do, your level of extra happiness will drop like a stone.

For the record, the best predictors of happiness are good old-fashioned values. Married people and people who go to church regularly tend to be happier than others. Childless couples tend to be happier than those with children, which might grate with some people but is evidently true. And people who live in one place for longer and therefore develop a greater sense of community will likely be happier.

With respect to the AFA paper, it is not surprising that people who see a financial adviser tend to be happier, richer and more purposeful. Hopefully, though, financial advisers are not claiming the credit for their clients’ fortunate states of mind. They can help a bit, but not much more.

Recent Investment Trends research found that as the financial planning industry prepares for a move to fee-for-service, some planners are looking to reduce their reliance on outsourcing investment services through fund managers. It found that 40 per cent of planners believe direct shares allow them to differentiate their client value proposition, while 18 per cent use separately managed accounts (SMAs). Almost two-thirds of planners were interesting in knowing more about SMAs as a way of reducing administration while offering improved investment expertise for clients.

With a shift away from commissions under FoFA’s proposed fee-for-service changes, financial planners will need to demonstrate the value they add to clients more than ever. The above research highlights this fact as well as the need for planners to look at innovative ways of maximising cost efficiencies within their businesses.

On the other side of the fence, however, it appears that clients prefer both fee-for-service and opt-in. A recent study conducted by MSI Global Alliance found that 68 per cent of business owners want financial planners to invoice them based on a fee-for-service remuneration model, while a further two-thirds regard the two-year opt-in proposal as a positive move.

With these changes, it will be vital for financial planners to communicate and demonstrate the value they add for clients. This is not always a natural strength of the financial planning industry. Getting to know your client, understand their needs and provide truly tailored advice will be critical. In times of market volatility, helping clients manage downside risk will be especially important – and this is a great opportunity for financial planners to take a proactive role with clients in truly demonstrating the value they add in good times and bad.

Selling the shares in a company is attractive as the seller may avail themselves of substantial tax savings (up to 50 per cent) via the small business CGT concessions. Such discounts are not usually available to the disposal of business assets (sold in isolation or as a going concern).

For the buyer, the key difference between shares and assets is the additional “baggage” that comes with a company. When you buy assets (such as a client list) that’s exactly what you get – the assets on the list. Other items that make up the business (like employees, intellectual property and leases) may or may not be included as part of the sale. When you buy a company, you get everything – good and bad – that is attached to that entity. Without doing comprehensive due diligence, you’re not to know whether it has unpaid tax or employee liabilities or whether it has complied with the terms of its licence.

It’s a substantial risk and one that the buyer will need to weigh against the opportunity/price being offered by the seller.

While Minister for Financial Services and Superannuation, Bill Shorten, has indicated that he would reverse a decision to ban commissions on insurance inside superannuation on personal advice, he remains steadfast on the contentious opt-in proposal.

Key independent MPs have also voiced concerns over opt-in – and it is these politicians who could decide the fate of FoFA. Bob Katter has already come out against opt-in, labeling it an “absolutely ridiculous” proposal. Katter has said he will actively oppose it, while other independent MPs have expressed serious concerns about FoFA. The coalition has indicated that it will oppose FOFA, and with key independents yet to be convinced of its value, it is clear that the government faces an uphill battle in getting FoFA across the line.

Believe it or not, your office environment is part of it. Do you have a place to greet clients? Does it give the right impression? Does your office look neat, organised, and most of all successful? Perhaps an image overhaul could help attract not only potential buyers, but new clients. So many times, planners believe that it is not the environment they operate from, but they advice they give. But in the world of charging for advice, looking like you are doing well in your chosen profession can often give clients comfort that they are buying quality.

This also goes for your staff. Are they well presented, and professional in their demeanor? Your staff are the biggest reflection of the culture of your firm, so if your staff do not reflect the image you want to portray for your business, perhaps this is an area that needs some professional development and attention.

Sometimes is really is the little things that make the difference.

Business owners are looking for ways to increase new business, and while organic growth is an option, any tangible results have long lead times. Growth by Acquisitions, of client books or a new business, is a proactive strategy to quickly increase both the top and bottom line of the business. This realization has led to more buyers in the market and whilst pricing/ multiples are somewhat less than pre GFC, it is still a sellers market, with demand outstripping supply.

There are also new sellers entering the market. Many advisers that still have the passion and energy for advising, but don’t want to ‘run’ their business in the post FoFA environment, are selling part or all of their business. Others are embracing change and FoFA, and are coming to market as buyers.

Despite the slowing of new business for some business owners, there is still a very active market for likeminded buyers and sellers to complete a successful sale in the current market.

Most businesses work on a percentage of cost as their mark-up, and very few people in related sectors work on an hourly basis. Yet in our industry, we are being pushed to hourly-based pricing for political reasons. It doesn’t make a lot of sense. The government says it will be more professional in that advice will be independent of products. That is partly true and no-one can complain about that, but a professional is never influenced by commission, and that’s where I think FoFA has it all wrong. FoFA came as a result of Storm, but the problem with Storm was their model and the fact they were licensed to operate that model.

We would never have had a Storm if they were never granted a licence by ASIC in the first place!

Whilst I have no issue with the banning of commissions, Count went fee-based last century, but if commissions are bad, why not ban commissions in all industries and bring on the 2nd Great Recession!

Using some low cost, high touch tactics, such as media relations can help. So too can harnessing the networking power of social media. While many planners really understand how to do this, a first step is to start forming an opinion that potential clients would be interested in. If saving is the new spending, how you can you add your expertise to what the press is already putting out there. It may be worth ringing a journalist, even if it is your local paper, and giving them your five-point checklist on what investors can do to safeguard their funds. If your opinion is sufficiently interesting and different, you are sure to get a run if you persist in offering it.

Social media is a similar animal – you need to enter meaningful conversations to win followers. First, identify where your target market already is – are they interested in sports, travel, antiques? If you can join a community and add authentic commentary you may well find it leads to business.

Of course, none of this is an exact science and it does take time. But without this investment, your business may stay where it is now. Any investment in growth has to be positive in this new environment.

If you would like to ask questions around this process, I am more than happy to answer them, via the site or even LinkedIn.

With the move to fee-based models and all the compliance red tape that that industry has become mired in, many advisers believe financial planning has become very difficult from a business point of view.

As a result, parts of the industry will fragment. You will find that more and more planners are going to gravitate towards certain client segments and provide “limited scope” advice – some call this “scaled” advice. Some planners will work primarily with young people in the mortgage area, and others will specialise in insurance, for example. Both of these areas are still commission based and will become more valuable than fee based businesses. FoFA is turning back the clock where you could look after a client without a 90 page plan!

Financial planning is going to increasingly be an industry for younger professionals, because they will grow up with the new rules and regulations. There won’t be any change for them because it will be all they know.

Different clients have different needs, so it makes sense to develop scalable advice models with corresponding fee structures. A recent industry survey also found that the CEOs of wealth management firms believed strongly that whoever successfully achieves a scalable advice model would have a distinct competitive advantage.

The survey, conducted by PricewaterhouseCoopers and the Financial Services Council, also found that greater exploitation of low-cost direct and digital distribution channels will play a key role in the future provision of financial advice. Many industries around the world have been adopting these kinds of business models for years. They are key to sustaining improving profit and overall competitive advantage. For some financial planning firms, scalable advice under FoFA could mean the difference between annihilation and healthy business success.

One of the first issues to address is tax advice. If not, you could be missing out on valuable CGT concessions or other tax benefits available. Too often the deal reaches execution stage, only for one party (usually the seller) to request a game-changing structural amendment due to the implications of tax advice received too late.

Another question is whether or not you will actually get paid. It sounds obvious, but if you’re not getting the whole payment upfront (which is most cases), you need to ensure there is certainty around the payment process. This means clearly setting out the elements that trigger a price adjustment (rise/fall clauses), taking some form of security over the buyer or their assets (such as a guarantee or a charge) and ensuring that the timing for payment is unambiguous. We usually throw in a penalty interest clause for good measure.

It is also important to consider whether or not the buyer is a good cultural fit for your clients. Obtaining the right cultural fit can make a huge difference to sellers due to the ease of doing business with the buyer and is likely to save time and costs in negotiations and consequently reduce the stress associated with the sale. Selling to a culturally aligned buyer will also ease the integration process and increase the prospect that revenue targets will be met and the price will be maximised.

The last important point to consider is where your risk exposure ends. In most cases, you will remain liable the acts and omissions of you and your staff pre-sale. However, there should be an end date to this risk and your lawyer should negotiate a limited claims period and a reasonable liability cap.

The main areas of deficiency in this area appear to be the large amount of financial practices that are ill-equipped for proposed FoFA changes and a lack of business accountability and/or planning (including initial set-up and ongoing monitoring of budgets and adequate financials) required to adapt to these changes.
It is also interesting how various FoFA changes would appear to have a direct affect over the sale of holiday packages in the tourism sector. My understanding is that lobbyists will be working hard on gaining an exemption for this sector in the regulations, as failure to do so could see many thousands of jobs in the tourism industry go!

However, getting clients to understand this is another thing altogether, and there is a considerable gap between what clients are prepare to pay for advice and what advisers think they should charge. ANZ research has found that it costs $3500 to provide a client with a holistic financial planning solution, yet clients are only prepared to pay $300. This advice value dilemma is a perplexing challenge for the financial planning industry, and one that must be addressed in the move to fee-for-service.

Financial planners are very interested in what their competitors are charging for advice. While this might provide some competitive advantage and also help in determining market rates, there is a missed opportunity in adopting this approach to fee establishment. There are a range of remuneration models available to planners, and FoFA presents planners with the opportunity to seriously reevaluate the value of advice and how this is articulated and communicated to clients in order to bridge the gap between they are prepared to pay.

Out of hourly fees, flat fees and asset-based fees, industry pundits believe that hourly fees are simply bad for financial planning business because this approach rewards inefficiency and clients simply don’t like the idea of being charged for picking up the phone to their planner.

It could be argued that hourly fees do not reflect the value that good, professional and experienced planners can add for clients. Charging by time does not necessarily recognise the expertise that a planner can bring to the table – and the subsequent difference they can make in their client’s lives.

While FoFA presents financial planning practices with a significant number of changes, there are also opportunities for those who take the initiative and explore revenue models that not only comply with new legislation, but are more reflective of the expertise that financial planners can add. Greg Bright, Director of Binalong Advisory Services, makes an interesting analogy to the travel industry in terms of its revenue models and how it articulates the value that it creates for customers.

In any case, financial planners really need to know their customer, understand their needs and provide truly tailored service. In this way, FoFA is more about evolution for forward-thinking planners who are willing to think about different ways of articulating the value they bring to the table.

Shadow Assistant Treasurer Mathias Cormann has come out firing against FoFA and accused Minister for Financial Services, Bill Shorten, of having a union bias in favour of industry superannuation funds. Senator Cormann has also indicated that the coalition would abolish FoFA if it was to assume power – however, Tony Abbott has not given any ironclad guarantee along these lines. Some financial planners claim that Senator Cormann is simply telling the business community what it wants to hear (which is what you would expect of an opposition spokesperson).

The FPA believes that those within the financial planning industry who assume the coalition will block or repeal FoFA are pursuing a high-risk strategy. Despite lobbying hard behind the scenes and crossing its fingers, the FPA has encouraged financial planners to start preparing for a post-FOFA regime, particularly as it relates to the banning of commissions on investment.

Politics is a messy game. With the government expected to release its draft FoFA legislation next month, it will be interesting to see just how much Minister Shorten has listened to the financial planning community.

This will change the way marketers spend budgets, advertisers shift their messaging into content and traditional PR and media relations become issue and audience driven. It also means that the corporate world can no longer ignore social media and its distribution power. While predominately utilised as a recruitment tool, social media can deliver more personal and meaningful relationships with companies through their individuals. Of course, the challenge here is to harness it and avoid the associated risks.

As you continue to hear this content story play out, please feel free to contribute to this important conversation or link in with any of our players to make your connections via social media.

The one thing that may offset this is the extension of scalable advice. If this was introduced, it would allow individual advisers to shape a simpler practice and offering for clients that have simpler needs, and charge a corresponding fee. It is true that FoFA will create more work and potential headaches for financial planners, but it presents an opportunity for firms that are willing to get on the front foot and think about improved business models, client value propositions and the client engagement process ahead of FoFA. Now is not the time to put this in the too-hard basket.

If you’re struggling with how FoFA might impact your financial planning business, No More Practice 2 is an invaluable resource. Professional Investment Service’s Robbie Bennetts has written an insightful whitepaper in which he looks at the impact that the fees versus overrides and commissions industry debate will have on the value of a business.

The AFA is also promoting the value of good advice, but also how the industry improves what we already do – and engages with us on how planners can improve their business models and valuations by changing the way they run their practices.

Both are passionate advocates for our industry – and very different CEOs. Both would love to hear your feedback on how you believe planners need to change, and what has already been done to increase professionalism, the value of advice and practice valuations. Please join the debate by commenting in our forum.

However, the translation of these principles into reality presents some potential issues, and this is what has the financial planning community concerned. In an interview with Networth News, Andrew Gale, CEO and MD of Count Financial, said that one of the first laws of major public policy and regulatory change is the law of unintended consequences.

He said one of the likely outcomes of the government’s proposed reforms to volume-related payments is significant acquisition and consolidation activity in the small- to mid-size non-aligned and independently-owned financial planning sector. While larger vertically integrated firms as well as some boutique firms would likely be okay under FoFA, Gale predicted that the big institutions would snap up the smaller ones which would struggled with changing business models under FoFA, and questioned whether such changes would be consistent with the original intent of FoFA.

Opt-in is another issue for many financial advice firms, and Gale said the proposed changes would likely result in some unintended consequences. These include an increase in the cost of advice and a risk of disenfranchisement of middle Australia, as Gale predicted a lot of advisers would gravitate towards the more affluent and high net worth of the market.

If there was a middle way that would satisfy both the government and the financial planning industry, it would have already been reached. However, the government needs take a long-term view well beyond its current parliamentary term to ensure that the execution of FoFA is in line with its overriding principles.

It is true that most collapses such as Westpoint and Trio/Astarra could generally be put down to failures of product. This has led to criticism of FoFA being too narrow in its focus, and that reform should also encompass those who develop financial planning products as well as those who sell them. This lends strength to the arguments of prominent financial planning figures that FoFA needs to be broader in its focus.

Most financial planning firms are ethical and take a similar approach to providing advice around sound products. The problem is that some financial planning firms are often lured to less-than-sound products by highly lucrative commissions-based remuneration structures. This is why Minister Shorten wants to crack down on conflicted remuneration structures, so the overall intention here is genuinely for the good.

It’s a shame that the financial planning industry has been painted with a brush tainted by a few bad planners. It’s a fine line between over- and under-regulation with FoFA. Financial planning industry groups such as the Association of Financial Advisers are lobbying hard to strike the right balance, and Minister Shorten would do well to take a bipartisanship approach with the FoFA legislation.

However, when Minister Shorten told #nomorepractice2 that he believes most financial planners would accept most of the changes. “The government’s pragmatic, I’m pragmatic, we’ll work these issues out,” he said.
But will they really be worked out? How much room is there for compromise and is there a middle way that will keep everyone reasonably happy?

Minister Shorten acknowledges that the two contentious issues are the ban on commissions on risk products within superannuation and a requirement for investors to opt-in to their advice agreement every two years. However, some industry players observe that advisers who rely on passive income streams from inactive clients rightly deserve to be afraid of FoFA.

So where does the fairness lie in FoFA? Is it possible to clean up the industry in a way that does not impose more red tape and cost? Get involved in the debate. #nomorepractice2 is an online community for financial planners, and policy makers are directly involved in the discussion. FoFA is one of the biggest changes in the history of financial planning for the industry, so have your say and make your voice heard.

Equally noble is the Opposition’s view on trying to support small business owners in defending the turf of financial planners. Most planners are incredibly hard working and passionate about protecting their clients and seeing them prosper. For them, the consumer is truly king, and their biggest fear seems to be that they won’t be able to serve their clients under the constraints of FoFA. Minister Shorten believes many planners are misinformed about FoFA. He is willing to take questions around this from planners, and answer their concerns honestly and fairly.
Any planners that do have questions – please log onto our forum. We have commitments from both Minister Shorten and Shadow Minister Cormann’s office that they will respond to your questions. Please have your say and be heard for the good of the industry and the broader consumer.

The government and Bill Shorten in particular have to walk a fine line, and in this case over-regulation is a real danger. The government sometimes has to step in curb the excesses that a few are inclined towards, but the danger in this is heavy-handed legislation that makes life unnecessarily difficult for the genuine and honest majority of financial planners.

In an interview for No More Practice 2, Shorten recently said that there is a degree of public discomfort with the financial planning community. He said that four out of five people aren’t using financial planners and affirmed that “the current model isn’t working”.

But it’s a bit of a stretch to claim that reform is needed because most people aren’t using financial planners, either because of the failings of the current model or because people distrust financial planners. There are many reasons people don’t use financial planners, and I think Shorten’s reasons would be pretty low on the list of most people.

Sadly, governments are often inclined to introduce broad, sweeping legislative change that turns industries upside down (think carbon tax) when a selective scalpel approach will do the job much more effectively and efficiently. But that would be too simple, wouldn’t it?

Professional development has never been more important in this dynamic and fast paced industry. Yet people have less time than ever to devote to it. It is this lack of time, plus a genuine interest in real people and their stories, and an understanding of how to engage people online that led to the birth of evoTV’s No More Practice. I knew when we were creating the first series that it would be a game changer. So many planners commented to me that they could relate to someone in the show, and that they watched it with more than fascination. It was the first time they had seen their industry portrayed in this honest and surprisingly entertaining format.

As we launch series 2 I am incredibly proud of the content community we have created, and the partnerships we have formed with our players in the show. Everyone involved has been not only passionate about the financial planning industry, but also about changing the paradigm of how this industry reaches out and connects with its own.

I know you will enjoy the conversations over the coming months with some of the most intriguing people in the financial services sector. It all leads up to series 2, which promises to be one of the most entertaining reality TV shows around. Who said finance was boring?

Financial advice is different. The product is a future benefit which is impossible to quantify in advance, let alone look at or touch. And no matter how good the advice, markets which are beyond his or her influence, can make the adviser seem like an ass in the client’s eyes.

Maybe, then, it is not the sort of business which should have paid commissions on the advice in the first place? Neither up front nor trail. Maybe if fund managers had supported a model where planners were always paid a fee based on the assets under advice, in much the same way as architects work out their fees, then we wouldn’t have gone through the massive restructure and disruption we’re currently seeing.

But the industry I would suggest that may provide some guide as to why financial planners will evolve their businesses into a sustainable and crucial part of the provision of financial services is not architecture; it’s travel.

By the end of the dot-com boom, in 2000, there were more than two dozen Australian-based websites which were trying to aggregate fare deals from local and overseas airlines and hotels for the tiny-but-growing online customer market. When the sharemarket corrected, their funding dried up and most either closed or merged. But the airlines, too, developed much better online deals and user-friendly services for direct customers. The travel industry had started a restructure which it is only just beginning to recover from.

Travel agents, who had their own deals with airlines and hotels for years, which they were able to pass onto customers while also clipping the ticket, were caught in the middle of this massive change in behaviour. Notwithstanding several big disasters, starting with 9/11 in 2001, the travel agents have managed to adjust their business models to the new environment. And the customer is, usually, far better off.

Some big firms, such as the ubiquitous Flight Centre offices, have concentrated on the price-conscious market. They offer good basic services at hard-to-beat prices. But don’t expect to be able to rent a trendy chalet in the south of France for that special holiday. On the other hand, some agents concentrated on their strengths in knowing their clients well and providing truly tailored options for the discerning traveller.

A handful of good online specialists, such as Wotif and Tripadvisor, survived and thrived, and the direct online offerings of all airlines are always worth a look, if only to keep the travel agents honest. As with other big-ticket purchases now, customers will do their research online before going into speak with someone about it.
For instance, a customer planning to go to Europe might prefer an airline other than Qantas either to save money or to get a different/better cabin service, or both. The three Chinese airlines servicing Australia, for example, employ Chinese hosties who are much less likely to accidently bump your arm off the armrest. And much less likely to look down their noses at you for asking for a second glass of wine with your meal. Or a third glass of brandy afterwards. But perhaps that’s just me.

The point is: the whole travel advisory and purchase business has evolved in a short space of time. If the analogy holds, financial planners, too, will differentiate themselves in various ways including both price and quality of service. Bigger practices with lots of overhead will have to be good marketers. Specialists can rely on word of mouth. Direct sales will grow, but probably only slowly, and new entrants will continue to emerge in various forms.

The history of economic endeavour throughout the ages has been characterized by increasing specialization. Financial services, from manufacturing through to advice, is no different. And at least with financial advice, there will usually be rewards for knowing your customer and providing a truly tailored service.