According to Radar Results principal John Birt, traditionally the difference in the multiple paid for a high-quality advice practice and a more conventional advice practice is approximately 0.5 times the recurring revenue.
In the current environment, conventional practices are going on the market for anywhere between 1.5 times and 1 times the recurring revenue. Further, the grandfathered clients are selling for between 0.5 times and 1 times, according to Radar Results.
“Therefore, the difference today between the valuation of a high-quality financial planning practice compared to a conventional one is possibly up to 1.5 times the RR; before 2018, it would have been 0.5 times the recurring revenue,” Mr Birt said.
“High-quality practice valuations haven’t really changed and there’s a higher demand now than at any time before.”
What does a 'quality' advice practice mean?
A quality advice practice, according to Radar Results, would have all clients having an annual fee level of between $3,000 to $8,000, and each adviser would manage approximately 100 clients located in a capital city.
In addition, the clients would all be fee-for-service with no grandfathered trail commission clients.
On the other hand, a conventional advice practice would have many clients compared with the number of advisers, possibly one adviser and 1,000 clients with 300 clients considered active, with the clients geographically spread across a large area.
A significant consideration for practices old and new are the incoming mandatory education requirements for professionals operating under an AFSL, limited or otherwise. This includes accountants. You can read more about this here.
The outcomes of the royal commission will also have a direct impact on the way financial advice practices are run, particularly those which are part of bank-aligned licences. This impact won't be directly felt by firms which have accounting services at its core, however, there are some considerations for multi-services practices. You can read more about this here.