An artificial Merger and Acquisition freeze was created in Financial Services and the wider community due to political and legislative uncertainty through the period from when Julia Gillard, on the 30th of January 2013, called the election date for September the 14th, followed by Kevin Rudd on June 27th calling the 4th of August. Additionally the date of July 1 2013 was the introduction of the “Future Of Financial Advise ( FOFA)” which caused further stagnation and introversion within our industry.

The Financial Services market uncertainty was due to multiple moving agendas, the shifting political sands (based on who ultimately won government) required consideration as to whether existing legislation and the 1 July 2103 compliance imperatives would be expanded or repelled . The only appropriate strategy was to deal with what was known and this moved the majority of Dealers and underlying practices to focus internally. The investment was $100’s of millions in revenue and client relationship management systems and the parking of any growth ambitions until some certainty returned.

This period ended when the new government’s spokesman Arthur Sinodinos made comments indicating delivery of pre- election promises in December 2013. Buyers immediately came back to market, but not sellers who remained cautiously on the sidelines.

The uncertainty however continued into 2014 with FOFA legislative review dates pushed out and Senate acceptance being dependent on independents and, critically, the Palmer United Party endorsement.

Dealer to Dealer transfers continued to be frozen due to the unknown, or widely disputed, treatment and understanding of the “new arrangement” and whether or not conflicted revenue ( volume overrides) were grandfathered.

At this time a number of studies were commissioned and released. Macro-Economics (http://macroeconomics.com.au) prepared a review of the major Banks, entitled “Control of the Wider Financial sector”. Within this were the findings that – the big four banks represented 34% of total funds management revenue and with AMP and Macquarie added equated to 70%. In regards to their representation in Financial Planning the 4 banks and AMP control 49% of total industry revenue. This report excluded IOOF whose acquisition strategy over the preceding years was equally successful and further exacerbated the Oligopolies control. The report argued the lack of competition in financial services would likely lead to a misallocation of private savings as well as contributing to inefficient investment decisions. Recommendations included that large groups should be precluded from further acquisitions unless they made a similar sized divestment, so market share was not further increased. Additionally government should curb the vertical integration of funds management, distribution and platforms, stating the current oligopoly stifled innovation.

Given the issues rising from within some of the bank advice distribution channels, it is believed that the big four’s appetite for greater participation in wealth management is sated for the foreseeable future, as a new understanding of risk is assessed. However, the existing domination of the majors is having dramatic impacts on the normal supply and demand of businesses for sale. This is due to the majors retaining what has been acquired and distributing internally- with many practices never being released to the wider market.

There are new well financed “independents” who are filling the vacuum that has been created and we have seen them emerge in 2014.

The Australian market saw $69.5 Billion in mergers and acquisitions across all sectors of Australia in calendar year 2013, as reported by Thomson Reuters.

The Financial Services market for 2013 was disturbingly quiet but it did not last as we entered the New Year of 2014.

Dealer Group Activity

The new calendar year of 2014 started with a bang in January with the Financial Index Wealth Accountants (Financial Index) acquisition of Centric for $130m. Centric has 52 advisers servicing $4.1b FUA plus a $1.3b loan book. Financial Index moved to $7.6 Billion Funds Under Advice (FUA).

Financial Index soon thereafter also made an offer, and gained an exclusivity period to the end of July, for Crowe Horwath, the fifth largest accounting firm in Australia, with an offer at 48 cents, which values the business at $131m.

Financial Index is extremely well managed and has done in excess of 42 acquisitions over the years and has built an industry best practice transition and workflow model that extracts immediate value. Also telling is they are culturally aware, with many sellers choosing to stay after transition and deal maturity.

Financial Index signalled they will continue their acquisition objectives.

The other very significant acquisition was SFG being acquired by IOOF at approx. 18.5 times earnings for $670 million. This acquisition positioned IOOF as the third largest financial advice business and one of the largest funds management companies in Australia. SFG has 182 advisers and IOOF expect synergy benefits of $20m by 2016m. IOOF has a strong track record on integration and importantly an open architecture and acceptance of different Dealer models, cultures and value propositions.

IOOF owned Bridges also acquired Credit Union Australia’s advice arm CUA Financial Planning.

We have witnessed and will continue to see a merging of professions – real estate coming into debt financing, mortgage coming into advice, advice going into property and debt, accounting into Financial Planning and vice-versa. Many of the leaders in their current industries are looking at acquisition opportunities to tap into organic opportunities, diversify their earnings and increase the client experience.

In 2013 we saw the collapse of AFS, AAA and Chambers, an Enforceable Undertaking entered into by Commonwealth Bank and the unfolding scandal with the class action suit against Financial Wisdom for more than $200m. This has created substantial brand damage to Financial Wisdom and CBA but also to the wider community confidence in advice. Further “EU”s were entered into by Macquarie, Wealthsure, Lionsgate , we saw recently Customwealth’s licence being suspended by ASIC and placed in the hands of administrators.

These events have raised the risk associated with Dealer group acquisitions and created a preference for greater control provided by Dealers with employed adviser models. This risk assessment and preference has been reflected in the prices of Dealer Groups.

Fortnum bought back the 20% stake from ANZ to align with adviser value propositions and competitively positions them for what is expected to be rising consumer recognition and need of “independent” advice.

The first of the much anticipated consolidation and merging of Dealer Groups was seen with the coming together of Infocus and Patron. We expect to see more of this as Dealers seek scale benefits, and for some to explore future listing opportunities to access wider funding mechanisms and liquidity for succession purposes. Most recognize for true liquidity there is the need to be in the ASX Top 200 -a goal that many cannot achieve on their own.

Centrepoint Alliance raised $14m as it continues a very real turnaround story that marks their separation from the past and positions them well for the future.

Administration and Trustee Activity

This area continued to be active with Diversa acquisition of The Trust Companys superannuation trustee business from Perpetual for $2.65 m.

Diversa also took a 30% stake in Tranzact Financial Services for $2.85m with an option to acquire the remaining equity.

OneVue acquired Computershare Fund Services and Super Managers Australia SMSF administration business. Additionally OneVue also acquired trustee MAP Funds Management. OneVue Successfully raised $6.75m before listing.

Managed Accounts listed on ASX with cash reserves of $6.7m.

Equity Trustees acquired ANZ Trustees for $150m.

Technology Activity

We have seen massive price appreciation of listed platform providers as well as new offers coming to market as the market confidently predicts the evolution from Masterfunds and Wraps to the new generation offers and the migration of massive Funds Under Management.

Rubik the owner of Coin continued its acquisition strategy with Easy Dealer Group for $2.7m with an option to acquire the parent group AMEE Easy Software Solutions at a later date. This was after its 2013 acquisition of Revex , a commission and revenue company. Rubik also acquired Stargate technology for $20 to $35m (depending on performance) providing them access to the mortgage broking industry. Rubik has also executed a binding agreement to acquire Infinitive Pty Ltd for an upfront consideration of $2.4m.

Decimal effectively listed via its acquisition by Aviva Corporation a natural resources and technology listed entity.

The technology sector is getting cashed up and needs distribution and we will see the coming together of the two in the foreseeable future.

Mortgage Activity

The mortgage industry enjoyed one of their greatest years on the back of property price appreciation. This was reflected in multiple corporate actions.

Genworth Australia listed for $583m.

Yellow Brick Road’s acquired mortgage originators Resi for $36m and also Vow for $17.6m. It now has a network of 700 brokers and a book in excess of $18b.

Coles stated it is set to enter the $1.2 trillion mortgage business and follow international examples like Tesco, depending on licencing requirements.

Wesfarmers is to sell its premium lending insurance arm for $1b to Arthur J Gallagher and Co. This follows Wesfarmers selling its underwriting business to Insurance Australia Group in Dec 2013 for $1.8b.

Bendigo and Adelaide bank bought the $1.7B loan book of Rural Finance Corporation. Bendigo will have an equity raising of $230m to fund this.

Bank of Bendigo also acquired the Geelong based financial planning business of Wheeler Financial Services. Their above activities points to the execution of an ongoing strategy.

Bank of Queensland is set to acquire Investec’s finance and deposit book for $440m funded by equity raising.

Finsure’s acquisition of Spectrum Wealth Advisers is an example of another broker coming into the advice space.

Fund Manager Activity

Access Capital and Challenger merged to form infrastructure boutique Whitehelm Capital.

Cromwell Property’s acquired 50% of Oyster Property with $5m upfront and $2.5m paid over 3 yrs subject to performance. Oyster has NZ $650m of property assets.

Euroz acquired stock broker and corporate advisory business Blackswan Equities Ltd. Black Swan has $1.4 b in FUA.

The Fund manager space has been extremely quiet but with Institutional dominance of distribution we expect significantly more merger and acquisitions in the future.

Financial Planning

As nominated in the introduction Financial Planning business to business transactions were subdued to levels never previously experienced by Forte.

In 2013 there was very little buyer demand as focus was internalised on the delivery of Annual Fee Disclosures and other FOFA compliance requirements. Buyer demand returned in December 2013 when there was some comfort that the government was going to quickly address the legislative uncertainty that had been created. FOFA amendment appeared to rank highly after Carbon Tax removal and stopping the boats in importance.

This confidence was not shared by sellers and few ventured to market given ‘grandfathering concerns” and risk associated with revenue maintenance which was potentially at risk by annual fee disclosure.

The immediate scarcity factor created was further exacerbated by the institutional hold of the majority of practices and their imperative to not allow businesses to come to market but satisfy seller and buyers requirements internally.

The imbalance of supply and demand saw Financial Planning businesses return from the 2.5/2.75 recurring revenue multiples to rise to the historical equilibrium of 3 times recurring revenue.

Forte did not facilitate any transactions on an EBIT basis in this reporting period but EBIT was used almost exclusively for internal shareholder equity discussions. The transactions discussed in this paper that references EBIT are large and significant and are not “bolt on” acquisitions.

For the timeframe being reported on, supply or absence of sellers was at unprecedented levels but in early August 2014 we have started to see a trickle return to market and it may turn to a flood as sellers emerge from retention bonuses, grandfathering uncertainty and client retention concerns, and look to capture scarcity premium pricing.

There are many new buyers in the market coming from complimentary disciplines or industries ( mortgage, property, accounting etc) representing not only capital but organic growth and real options to not only continue the legacy created by sellers but to take it to greater heights for staff and most importantly clients.

Many new participants see themselves as disruptors by taking on the banks and accepted business model norms. The new entrants are unencumbered with legacy technology and have great pools of potential clients to deliver advice services to.

Forte believes there will be significant practice movement from existing to new licencee’s when certainty on grand fathering is provided. This confidence is reflected by our own acquisition of “My Dealer”, which assists practises to select and migrate to the best Dealer specific to their individual needs.

As an industry we appear to have been in a seven year cycle of challenges and strong head winds. However, in the first months of the new financial year 2014/15 there are definite signs of confidence returning with the All Ords breaking the psychological barrier of 5,500, the emergence of new entrants opening new markets, rising consumerism, adoption of new technology, adviser Dealer movement and dealer mergers all pointing to a resurgence of activity. We are genuinely excited by the industry throwing off the shackles of the past and embracing the immediate future and beyond.