Investment advisory businesses

Investment advisory businesses have recently seen earnings drop due to the recent market downturn. As a result funds under management have decreased leading to reduced trail commission or client fees. The good news is this is likely to be a temporary situation as history has shown us markets generally always bounce back.

Investment advisory businesses should pay attention to the ‘value for money’ discussions occurring between the Financial Markets Authority (FMA) and fund managers. The FMA is keen to see some fund managers reduce what they perceive to be excessively high fees. This approach may flow across to FAPs and the FMA may also start to ask FAPs how they justify the fees charged to clients.

Focus will also come onto FAPs as fund managers gradually stop including trail commission in their fees and instead create facilities for advisers and clients to agree upon a service/advice fee and have this deducted from their portfolio each month. FAPs who already charge clients a realistic fee and service their clients well will not be affected. However, those businesses with large client numbers and minimal client service may see a value decline unless they implement new technology, templates and service propositions to service low value clients.

Personal risk advisory businesses

This is the sector where we are seeing the biggest value variations and price reductions and we believe there are three main causes:

1. A growing understanding of the significance of the Record Keeping FAP Standard Condition. Purchasers are realising that if they purchase a book of business and the files do not contain sufficient information to explain why a client holds certain products, then someone must incur the time, effort and expense to get the file to the required standard. This could initially be $200 of time and if the trail commission is only $150 per year, then how much is the revenue stream really worth?
2. Ability to service large client bases. In the old advice regime, many risk advisers built massive books of business without having the capacity to service all these clients and prove suitability of advice. However today, if a small FAP purchases 500 risk clients, then how long will it take to get around and service those clients? Some advisers believe they have 12 months but this is not the case. If a FAP purchases a client base and wants to be remunerated for that, then it needs to be able to demonstrate to the FMA and the product providers how those clients are being serviced. The purchaser may need to sign a new distribution agreement with the product provider and this may contain prescribed service standards.
3. Tightening of rules around replacement business. In the past, many purchasers of insurance books could pay for the acquisition within one year by moving clients from one provider to another and justifying this as being in the client’s best interest. Some call this “doing what is best for the client” whilst others call it “churn.” There is a growing concern that over time, product providers and the FMA may take a bigger interest in replacement business and want to see more substantive justification for the move from one product provider to another. If this scenario plays out (like it has elsewhere in the world), then the market value of insurance books will need to adjust to reflect an increased time input and reduced quick revenue from implementing product replacement. This could over time see risk books reduce in value.

Mortgage and general insurance advisory businesses

At this stage, values are remaining static even though both sectors are under pressure. Mortgage advisory businesses have struggled to get loans approved and there have been delays in house completions. This results in more work needing to be performed by the mortgage adviser but it has not translated to reduced valuation multiples. The general insurance sector has been impacted by staff shortages, poor technology and increased client demand but once again, this does not reduce the valuation multiple.

If you are concerned about any of the issues raised in this article and how they might be impacting the value of your business, or you would like to get your business valued, then contact us for more information.