Per an ASX announcement on Monday, Clime has entered an agreement to sell Madison Financial Group (and the WealthPortal platform) for $2 million.
Madison's adviser network collectively represented around $3.5 billion in funds under advice as of March 2024; the buyer, Infocus, will boost its FUA to over $16 billion once the transaction is complete. While Clime said the agreement would ensure a "smooth transition" for advisers thanks to cultural alignment, it's unknown at this stage how the sale will affect Madison's potential “adviser-owned structure" – an idea Clime was "actively exploring" back in January.
Does this story sound familiar? It's probably because while history doesn't repeat itself, it often rhymes: just over six months ago, Insignia (née IOOF) sold licensee Millennium3 to WT Financial Group for $2 million. Around the same time, Australian Unity sold off its advice arm in a "tripartite alliance" with Fortnum and AZ NGA-owned Nestworth Financial Strategists.
While it wouldn't be too difficult to conjure up some kind of theme here, let's avoid falling prey to recency bias. Instead, let’s ask: what factors inform the terms of these agreements?
You'll hear ample references to strategic fits, growth phases and captured opportunities when the media release rolls around, but what actually goes into selling (and buying) a licensee?
Put another way: when you buy an advice business, what are you really buying?
Caveat emptor (& venditor)
According to Connect Financial Service Brokers CEO (and Advisely expert) Paul Tynan, this question isn't nearly as simple as it appears: "With dealer groups, it's buyer beware and seller beware.”
The reason for this, he explains, comes down to ownership – or the sense thereof. Regardless of the specific contract an adviser might have with a given dealer group, there’s a prima facie assumption that they “own” their client book (and, by extension, the portion of FUA it represents). After all, they’re the ones actually having the client conversations.
Paul continues: “Even if you, the buyer, own the FUA – totally, technically, legally – can you be certain that everyone will transfer across?”
In Paul’s experience, a certain amount of attrition is “inevitable” when these deals happen. This partly explains why the “what are you buying” question can be so difficult to answer; it’s also why, he adds, orphaned clients have been “the biggest growth area in the past 10 years.”
Faultline
Of course, there’s a simple reason why a prospective buyer might be willing to take that risk: in an industry that’s shrunk to almost half the size it was five years ago, acquisition seems like a more viable growth strategy than relying on new entrants and new clients.
In fact, this was already the calculus for mid-tier and larger licensees back in 2022 – when there were nearly 2,000 more advisers on ASIC’s register, mind you. An Adviser Ratings report from that year found that licensees, most of whom had moved from turnover percentage to flat-fee pricing models, “were looking for acquisitions to achieve scale.” The same report also noted that “with acquisitions comes the delicate dance of adviser retention.”
Putting aside the less quantifiable factors like cultural alignment, one of the main reasons the acquisition “dance” is so delicate is because of the competing pressure on fees. Quoting the Adviser Ratings report again, licensees are charging “healthy fees per adviser to create a sustainable business model.”
On the flipside, those “healthy fees” have “forced [some practices] to rationalise the services they have sought, while others have sought to achieve greater scale to counter these costs.” If these measures (along with the risk of adviser attrition) create a natural ceiling on licensee fees, acquisition isn’t just a growth opportunity – it’s practically a necessity.
You have to wonder, though: what happens when everyone has a dance partner? There are only so many advisers to go around, and while the recent uptick in new entrants suggests the industry might be stabilising, established dealer groups still have to contend with the growing trend towards self-licensing and smaller, privately-owned AFSLs.
Licensees can (and likely will), of course, continue refining their services and pricing models to court existing advice practices. But until the industry starts showing signs of a full recovery, there’s a somewhat hard limit on how much scale you can wring out of it.
Perhaps one solution would involve capitalising on the Government’s proposed “qualified adviser” model. As FAAA CEO Sarah Abood recently told Advisely, there’s “nothing stopping” advice businesses from hiring their own QAs – both to offer a low-cost advice option (for the clients advisers usually can’t afford to serve) and to potentially train into comprehensive “relevant providers” in due course.
The problem, according to Paul Tynan, is that even some of the biggest licensees might not “have the capital” to tackle the mass market. But he knows who does.
Red, yellow and blue
“The reality is that most of this industry is small operators,” Paul says, “and they simply don’t have the resources to grow the next generation of managers or the next generation of planners. You need the capital to do that, and the only ones who have it are the banks.”
While he’s optimistic about super funds moving into advice, he notes that “they didn’t really want to go near it; they’re only taking over because we pushed them down this track.”
Ultimately, Paul doesn’t see Australia’s advice gap being closed without some form of vertical integration: “It had a role in affordability in the past. Whether it’s subsidised across a fund’s member-base or provided by a bank, you need some way to get advice to the people who need it.
“The amount of people who are coming up to retirement, don’t have a clue what they’re doing and don’t have anything in super is staggering – and the younger generations will pay for it.”
Of course, we don’t know if the banks even want to get back into advice. And if super funds are as reluctant as Paul suggests, one wonders for how much longer this can will be kicked down the road.
In the interim, maybe there’s an opportunity here for licensees looking to scale up – if they can afford it.
Advisely Team