Bigger practices more profitable: Radar Results
A Radar Results analysis of 500 financial planning businesses has found larger practices earn around three times as much in annual fees per client as smaller practices.
The analysis, based on business appraisals conducted since 2006, focused on practices located predominantly in Victoria, South Australia and Queensland (only 13 per cent of the businesses were based in New South Wales).
'Small practices' were defined as businesses with an annual recurring revenue of between $500,000 and $1.5 million. 'Larger practices' were defined as those with a recurring revenue between $1.5 million and $4 million.
The average fee per client for a small practice was between $1,000 and $2,000, whereas larger practices took in an average fee of $5000 to $6000 per client.
The average recurring revenue per client for all 500 businesses was $2,619, and the average recurring income for each practice was $1.3 million (the average total income per practice was $1.51 million).
Radar Results principal John Birt said the results would help planners measure themselves against the industry average.
"I see a lot of inefficiencies in financial planning practices which can be overcome with technology and merging. The number of staff required today to run a good-sized practice would have to be half what it was 20 years ago," Birt said.
The analysis found that on average each practice had 2.3 partners, 7.7 staff and 616 clients. The average income per partner was $688,000, and the average income per staff member was $245,000.
Birt said larger practices tended to sell on a multiple of earnings before interest and tax (EBIT). The analysis found the average EBIT per practice was $507,000.
"The highest EBIT within the analysis, as a percentage of revenue, was 59 per cent - with the average being 33 per cent," Birt said.
"The EBIT multiple paid today for a quality financial planning business has fallen significantly, probably sitting at around four to six times," he said.
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