AFG offloads planning arm to Sentry

WESTERN Australian-based mortgage broker Australian Finance Group has learned first-hand the difficulties making money from financial planning dealer groups.

Six years after establishing its planning arm, the country's biggest mortgage aggregator has sold the 190 planner-strong network to East Perth-based Sentry Financial Group in a cash and scrip deal.

AFG managing director Brett McKeon said the capital from the sale would be used to bolster other areas of the business, such as new lending products.

“We felt that at the end of the day we could get a better return on our capital elsewhere," Mr McKeon said.

“The margins are very thin and your obligations are very onerous. It's a tough industry to make a profit."

Dealer groups, which license networks of financial planners, are notorious for not making money, with listed company Count Financial being one of the notable exceptions.

Banks are able to run the businesses at a loss, in the hope that by spruiking their investment, retirement and insurance products to tied advisers they'll more than compensate for the loss.

Dealer groups are also potentially open to litigation, which has been magnified by the list of investments that went sour during the financial crisis.

Mr McKeon said dealer groups weren't getting the margins in keeping with the risk they took on. He said a review of operations determined the planning arm would be better off merging with a group such as Sentry, where it could obtain the necessary scale.

As part of the deal, AFG has taken a stake in Sentry, and there is a referral-type agreement between the financial planning and broking businesses.

The purchase has lifted Sentry to the top 15 dealer groups in Australia, according to adviser numbers.
Industry veteran and Sentry chief executive Murray Hills said the dealer group had grown its adviser base to 320 across Australia in just six years.

“The bulk of the growth has come from acquisitions," Mr Hills said.

“Small ones are struggling; people say less than a 100 is not economic."

Professional indemnity insurance continues to be one of the biggest headaches for the sector, with industry participants claiming premiums have risen by about 40 per cent during the past 12 months.

Larger groups are able to negotiate cheaper insurance arrangements and product research than smaller dealers, and the ongoing costs associated with the industry such as compliance are also scaleable.

Mr Hills said the industry would continue to consolidate, handing control to the major institutions.

“It's almost back to where it was 20 years ago," he said, referring to the institution-tied insurance agent origins of the industry.
Sentry counts ING Australia - now ANZ Bank - as a substantial stakeholder with a 37.5 stake in the business.

Mr Hills said the bank didn't have any input into the group's approved product list - those products that its advisers are permitted to recommend - and that advisers were attracted to Sentry because it wasn't 100 per cent bank-owned.

He said institutions did, however, expect to gain attention from advisers by investing in dealer groups.

“Banks do buy into dealer groups to get a foot in the door," Mr Hills said.

“That's commercial. If the product stacks up you can't argue with that."

The financial planning industry is facing a structural overhaul as parliamentary committees and industry groups debate proposed reforms, with trailing commissions - ongoing fees paid to advisers by product manufacturers - among the more controversial issues to be under the spotlight.

Mr Hills said the outcome of the overhaul would have a profound effect on those seeking to sell their practices, as owners could traditionally expect to receive 2.5 to three times recurring income, which is largely generated through trails.

“My concern is if we move wholly to fees the value of the planning group will fall," Mr Hills said.

“When we finish having that debate, whichever way it goes it will affect the value of practitioners."