Advice practice profitability falls
Average advice business profitability has fallen from 28.2% in 2020 to 24% while clients per business has plateaued, according to research from BusinessHealth and Midwinter.
The joint ‘Future Ready IX’ 2020-21 report tracked 200 principals from advice businesses including Australian Financial Services License (AFSL) holders ranging from large institutionally-aligned groups through to boutique self-licensed practices.
Rod Bertino, owner of BusinessHealth, said it was important to consider that average revenue per practice had remained steady at $1.2 million over the past two years, despite many “revenue- impacting issues” such as the capping of life insurance commissions and the implementation of a new fee disclosure regime.
“But that has come at a cost – profitability is down,” he said.
“So while they've been able to maintain revenue, the cost to deliver that revenue has increased.”
While the average number of clients per business dropped from 715 in 2017 to 530 in 2019, this had now stabilised at 564.
Meanwhile, the average number of clients per adviser fell from 241 two years ago to 228 and the number of ‘A’ class clients they advise increased from 79 to 105.
The report concluded: “It would appear from these numbers that Australian advice businesses are becoming much clearer on who they can best serve, and they are continuing to build their businesses around these target clients”.
Bertino said one reason why advisers had been able to maintain revenue was because they reviewed their pricing model.
About three in four firms had strategically reviewed what they charged and what they delivered for what they charge while 20% had started to charge for their initial appointment.
“To us that's an acknowledgement of the value that advisers deliver even in that first meeting, and an acknowledgement that their time is valuable.
“And if they are delivering value, they should be financial compensated for that.”
Finding scale through technology would be the “true enabler” of profit while some firms could choose to outsource, according to Bertino.
He also said there was opportunity for outside businesses with complementary skills to support the 60% of advice businesses who were single owner businesses, not just with advice but with business issues.
The report’s calculation of profit nationalised owner’s salary to benchmark across firms, assuming a $100,000 owner’s draw.
“We know it's low but as long as we assume the same principal draw for each business, we're able to benchmark across practices and compare and contrast,” Bertino said.