As a profession, advisers are significantly short-selling themselves, with many deterred by research around how much people are willing to pay for advice, according to WT Financial.
Speaking at an investor webinar, founder and managing director, Keith Cullen, observed that the market has now transitioned into a profession with the bulk of fees being advice fees paid by consumers, compared to the previous mass-market distribution model driven by commissions.
He said the complexities of clients’ financial situations meant advisers should be willing to charge more, particularly for the level of work involved in the advice process.
Cullen said: “We’ve genuinely transitioned into a profession, with the bulk of fees being advice fees paid by consumers. A fair few advisers have made that transition and made it very well, others have made it pretty well, and others are still struggling with it and they get turned off by surveys they see in the market about what people are willing to pay for advice.”
He observed a number of advisers are continuing to undercharge for their services.
“There’s a lot of advisers out there still writing Statements of Advice for people, a lot of work involved in that, and they’re doing it for as little as $1,500 to $2,500. The market average there is around $3,500 for a piece of upfront advice, but it should be significantly higher than that given the work and the risks associated with this profession,” Cullen explained.
“We see a lot of advisers still not charging implementation fees when clients are proceeding with their advice, so it’s a big push for us to encourage advisers to do that.”
According to Investment Trends, the average fee in the financial advice industry is $4,000 upfront and $4,700 for ongoing relationship fees.
Research by Adviser Ratings last year found one in 20 would pay $2,500–$5,000 for advice, and one in 40 Australians were prepared to pay $5,000 or more; Cullen confirmed some of the firm’s clients were indeed paying this amount. However, the average ongoing advice fee was $3,750.
“Of those clients that are paying $5,000 or more a year, [they] average $7,500 a year [in advice fees]. And of course, there are many clients that are prepared and have the capacity and also the complexity in their finances to pay considerably more than that,” Cullen explained.
“The onus is on the advisers obviously to prove their worth and the best way to test whether the clients are valuing what you’re doing is to tell them you’re having a fee increase. But, we think there is a great opportunity there.”
However, he disputed the idea that only wealthy clients or high-net-worth individuals would pay for advice, saying advice should be suitable for the needs of middle Australians, particularly those who are entering or transitioning into retirement.
“There’s an interesting thing that people look at in our profession and think the more money someone’s got, the more they’re prepared to pay for it. That’s not necessarily the case,” he said.
“Advisers don’t necessarily need to target people with a lot of money; it’s more people with a need and where they can have a significant impact.
“Certainly you need a reasonable asset pool to be able to afford advice. The average Australian household has got $300,000 in super at the moment and that number’s only going up and up, so it’s more about targeting the right people.”
Revenue opportunity
According to Wealth Data, there are currently around 15,701 advisers in the industry as at 7 September 2023.
However, looking forward, WT Financial foresees adviser numbers to stabilise at some 12,000 for a decade or more based on numbers from the ASIC Financial Advisers Register (FAR) and the firm’s own analysis.
It argued new entrant numbers are on an upward trend, but not growing fast enough due to high barriers to entry to replace the natural retirement number and exodus of advisers, according to Cullen.
This equates to a client pool of just over a million people with about 88 clients per adviser, particularly as adviser numbers are shrinking at the same time as client demand for advice is growing.
According to Wealth Data’s analysis of financial adviser gross revenue generated for the financial year 2022–23, the average comes in at some $463,258, calculated as adding up all the revenue and dividing by all advisers.
The top of the range sits at around $600,000 per adviser for one company and goes down to $236,550 for another.
The research house looked at AMP, Insignia, Diverger, Sequoia, Centrepoint, Fiducian, Count and WT Financial Group for this analysis.
Cullen echoed this sentiment and said it aligned with the firm’s figures of an average of about $440,000 per annum per adviser in average recurring fees.
“I’m not talking about practice principals – we’ve obviously got a lot of senior advisers earning considerably more than that – I’m talking about every single man, woman, new entrant in the profession averaging that in just ongoing advice fees.
“And that’s before we even consider risk insurance commissions and upfront advice fees for new clients, which presents an opportunity for considerable growth,” Cullen said.
He continued: “We think that all nets out to where the profession should be targeting itself, around about $650,000 to $700,000 per annum per adviser. That demonstrates the profession is currently short-selling itself by about 40 to 50 per cent.”
A 40yo paying $3500 every year for the rest of their life is going to be far worse off than one not paying this fee. Fee for service charged outside product is the only way the industry can become a profession. There is limited strategies beyond the initial advice that is going to provide any meaningful difference financially for a younger client.