Financial advisers are rushing out to buy client registers ahead of the official Future of Financial Advice (FOFA) start date of 1 July 2013, without taking complete consideration of the risks, an advice executive said.
“A lot of advisers see FOFA as an opportunity to have some growth in their business – so perhaps they’re not growing quickly enough organically and seeing that other advisers are in distress – so there’s maybe a bit of an opportunity for a fire sale,” Russell Investments head of advice capability John Nolan told InvestorDaily.
“Having helped advisers with succession planning over the years, [I’d warn] them to be really careful because what looks like an absolute bargain could have a whole lot of issues and dangers [associated] with it.”
Nolan’s comments come after adviser interest on Russell Investments’ ‘Helping Advisers’ website has shifted from FOFA guidance to advice on how to grow planning businesses.
Many advisers were looking to make deals before opt-in comes into play so that they can benefit from grandfathering provisions, he said.
“That’s fast-tracking a lot of deals that otherwise might have taken years to come on board,” he said.
“There are still a lot of horror stories about when those deals go wrong.”
Advisers who benefited from succession planning had sought clients that were better to work with and looked to buy a business they could be proud of, rather than buying for an income stream. However, most advisers’ focus was on the money, Nolan said.
“They think: for me to buy this business I need to borrow x, it’s going to cost me y, it’s generating an ongoing revenue of z, which means that within three to three and a half years, I’m in front,” he said.
“Once upon a time, that was probably correct but with opt-in, clients disappearing, changes to what you can and can’t charge and the spectre of the global financial crisis, there are all sorts of things that are in play.”
In addition to the advisers who were eager to make deals before 1 July 2013, another group were waiting for the market to recover before selling their business, Nolan said.
“When a lot of advisers heard that FOFA was coming, they were tidying up their books, trying to make themselves more attractive but a lot of them that charged ongoing fees based on asset values have said they can’t sell now and need to wait until the market has recovered to maximise its sale price,” he said.
“For small business owners, this is the equivalent of their retirement fund so if they sold today and the market went up 20 per cent in two years, they’d be kicking themselves.”
Advisers had an “eagerness to make a deal before 1 July as the FOFA clock is ticking” but there would always be opportunities for advisers to buy client registers, he said.
