Advice businesses need benefits of scale

The banks’ exit has created space for consolidation and the emergence of the new mid-tier advice market as the businesses need the benefits of scale, Easton’s managing director, Nathan Jacobsen, has told Money Management.

Scale, he said, was something that advice businesses needed in particular right now, given the overall rising costs and the ever-growing complexity of compliance consuming their time, as this would enable significant investments in essential technology’s upgrades.

“One of the challenges for the industry is the technology infrastructure [advisers] rely on is out of date and is inefficient and we need to adopt a real transformation and modernisation of licensees businesses whether it will be machine learning, robotic process automation, [the technology] needs to become central to services businesses like mine and adviser businesses we support,” Jacobsen said.

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“But that requires capital and capital comes from scale. I think the benefits of scale give you the capacity to invest, particularly for technology.”

Speaking of the future business models of advice businesses and the void left by the banks’ exit, Jacobsen stressed all the business models actually had a future and would be there to stay.

That would include large salaried adviser businesses and large dealer group service businesses and a number of different hybrids of these models.

“Easton is growing and we do want to become one of the leading firms in the market and we see the future both in terms of taking equity stake in advice practices to help them accelerate their growth as well as providing a flexible, open architecture service business that [advisers] can rely on, and provide the industrial scale that advisers can get on and service their clients,” he said.

The recent few months saw a number of mergers and acquisitions across the mid-tier advice business segment, which included the Centrepoint’s announcement to acquire Clearview’s advice business or the earlier announcement from WT Financial Group acquiring Sentry Group.

Jacobsen stressed that the exit of banks started a deconsolidation of advisers out to mid-tier licensees, in search for more scale and size in order to remain sustainable, but also saw a lot of licensees within 50 to 100 adviser mark who were more challenged as far as their financial performance  was concerned  and they would be as well looking for the opportunities to join a larger organisation, he said.

“I do think there is a consolidation phase among service providers that will play out in the next two to three years and the other big theme is advice businesses themselves are also consolidating and growing into bigger firms,” he said.

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This seems more like an advertisement than news.

It is a total myth that advice businesses need scale. The opposite is actually true.

The biggest challenge for all advice businesses is monitoring and supervising the behaviour of its advisers, to a level required by regulators. Small practices can do this relatively easy when the principal recruits like minded advisers and works closely with them every day in the same location. But when the number of advisers and locations increases this becomes more difficult. Expensive, inefficient, systems and processes need to be introduced in an attempt to mimic the supervisory role. This problem is compounded when the new advisers are Authorised Reps rather than employees, because the monitoring and supervision that is inherent in an employer relationship doesn't exist with ARs. It needs to be replaced by clunky AR agreements, which are nowhere near as effective.

One business that does benefit from scale is product distribution. When dealer groups talk about the need for scale, they are actually speaking as inhouse product providers, not advice businesses. Advice is just a product distribution overhead for them which they are happy to incur additional costs for, if it is more than offset by additional inhouse product sales.

Couldn't agree more! Everything you've said is the reason why I left the dealer groups and went self-licenced. My direct costs are definitely a bit higher than they were - but the efficiencies I've gained by not having some muppet 600km's away regulating me to the lowest common denominator have more than made up for it.

Not only all of the above wait until you see salary levels as the exodus continues of AR's, it'll become a salary auction over the next couple of years and more.

You can still get 30%+ gross margin with a two principal practice. That's good enough for me.

Hear, hear! Great to see these comments. I have been approached to bring on AR’s to the business, but by the time I add back the costs and risks I’d rather just stay in that 2-3 partner, one practice space where we can deliver great service and control risks. Having siloed advice businesses under my AFSL would make me very nervous.

We chose the non insto licensee space instead of our own AFSL and we too are very happy with them and with a cap on growth ambitions, we are not far off a soft close on new business and some practices in the group have already closed for new business. They, and we, are both very happy and very profitable and have a great work life balance (for a business owner).

Agree to disagree. Smaller advice practices are being forced out of the industry. Dealer group fees are now north of 50k per annum, regardless of the size of your business. Scale is essential. One man bands with 200k of revenue (very, very common) are being gobbled up at a rapid pace.
The added cost to serve has made scale more important than ever. You need scale to invest heavily in tech and systems, you can't do this effectively with a one man band, the costs are too significant.

Agree to disagree. $200k is not a business, it's not even a job, your net pay would be higher on salary. I'm talking 1-2 partners and 6-12 times that revenue number.

It's no surprise that dealer group fees are going up. Nor is it a surprise that dealer groups are trying to ditch or merge smaller practices. But dealer groups are not financial advice businesses. They are financial product businesses that use financial advisers as a sales force. It is an expensive, complicated, model that can give advisers who work in it a distorted perspective.

Break free from the world of dealer groups, and you'll find that the core business of financial advice is nowhere near as expensive or complicated. Plenty of small self licensed practices are doing just fine.

You need to catch up with the times. Our dealer group has zero product revenue I can invest almost anywhere on almost any platform and our clients benefit from fee rebates through managers on the managed account that we run (not our dealer).
The asset consultant is completely independent of us and the dealer. Our managed account has no fee income of any nature from any source to us or the dealer at all. Clients pay us fixed annual fees that are split between dealer.

I don’t suggest that self licensing is not ok but it’s not for everyone but you also need to recognise not all dealers are bad either. ESP the non insto ones.

The big advantage I have is I don’t have the same regulatory burden of a self licensed practice, I average 4 days work a week and have a very profitable business and no insto ties and work life balance that works for me. Yes probably more expensive than self licencing but it's a good investment as far as I am concerned as I can either focus on servicing my clients, selectively growing it or on personal interests including leisure time.

The next post Hayne FP scandal in my mind will be with the bottom 25% of self licenced practices that should never have been self licenced in the first place as they aren't following the rules in our compliance quagmire that all FP's need to negotiate, no matter your licencing structure.

I choose to be Better not Bigger.
Better clients. Better bottom line. Better quality of life.

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