Profitability and scale go hand in hand for dealer groups
A new costs and revenue survey by Dealer Group Advisers claiming dealer groups need at least 100 advisers to be profitable has received a mixed reaction from groups in the Money Management Top 100 dealer group survey.
Essentially, the research found revenue from a smaller number of advisers would not be sufficient to cover the fixed costs of running a dealer group.
Wealthsure director Darrin Pawski says it “wasn’t until we got to about 70 advisers that we felt we had the ability to start to run a profitable business”.
The group increased its advisers from 93 to 130 in the 2005-06 survey.
Pawski agrees that about 100 advisers is necessary for a group to get the economies of scale that are so important to profitability.
“Without the ability to negotiate with providers, it affects your bottom line, especially as margins are continuing to be squeezed, and these days by the advisers themselves.”
He says Wealthsure outsources many compliance functions, such as research and technical services, which were sensitive to economies of scale.
“Without scale here our bottom line would be severely eaten away”.
Peter Mullens, director of Madison Financial Group, says adviser numbers “apply less to profitability than the volume or the size of the practices within”.
“Any institution-owned dealer group will tell you production comes mostly via the top 20 per cent of advisers, regardless of a group’s total adviser numbers.”
Mullens says Madison grew by 22 advisers to a current total of 33 in 2005-06 as a result of the addition of 10 new practices, and is set to expand by 10 practices in 2006-07.
He expects the new “mature” practices to deliver a similar number of advisers but the sum of their funds under management to be as high as between $2 billion and $3 billion.
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