Days numbered for value of grandfathered revenue

JNP Capital director Jason Phillips said that FOFA-ready revenue streams are already commanding a premium over the more supposedly-reliable commission-based revenue model (notwithstanding risk-focused businesses, which can continue to operate a commission model post-FOFA).

"In broad terms, commission income [on investments], whilst some of it will be grandfathered post 1 July 2013, it has a relatively short time frame," he said.

"Best interest provisions will potentially force the planner to reconsider the client's arrangements, and if they do change the client's arrangements, those grandfathering provisions will no longer apply to that revenue," he added.
And from a valuation point of view, grandfathered or non FOFA-ready revenue should be considered at a lower value than FOFA-ready revenue, he said.

"Revenue that is FOFA-ready is receiving a premium and revenue that isn't, or is grandfathered, is being discounted. The value of grandfathered revenue will start decreasing from day one [of FOFA implementation]," he said.

Mr Phillips said that while demand remained high across the board for quality financial planning businesses, that demand wasn't necessarily being driven by institutions.

"Institutions are taking direct interests in financial planning practices or investing more in practices they have got, [rather than] acquiring other bolt-on acquisitions - that level of activity has been coming off for 12 months," he said.

"The majority of institutions have - or have started exploring - equity models in various forms, although execution has been a bit light. If those models come into play, they just create another layer of demand for financial planning businesses."

Mr Phillips said that for a planning practice to be attractive to institutions in a post-FOFA environment, they'd need to demonstrate a history of product placement or have the potential to do so.

It will become more of a product play for investment because otherwise the numbers won't stack up from a merger and acquisition perspective unless the price comes down, he added.

"It's not all about sales and building your financial planning dealer network," Mr Phillips said.

When institutions have looked at equity partnering models, they are underwritten by expected rates of return from the investment. But as a standalone business, it's hard to get the required rates of return based on current valuation models without taking consideration of future product revenue, he said.

"The more pressure that exists on whether the institutions can do that from ASIC's point of view and a corporate governance point of view, will have quite a distinct bearing on what values will do in the future."