Client profitability key as advisers navigate growing cost to serve

The days of financial advisers being “all things to all people” are behind us, as practices face a balancing act of rising fees alongside perceived value.

Operating an advice business in Australia has become an expensive endeavor in recent years, with the cost to serve per client sitting at $4,000–$4,500 on average, according to Wealth Data founder and director Colin Williams.

Investment Trends previously discovered advice firms with a profitability of 40 per cent or more were charging upwards of $7,700 per annum, with this figure climbing even higher for those servicing ultra-high-net-worth (UHNW) clients.

“What we’ve obviously seen is that the costs associated with servicing clients have gone up,” Williams said in conversation with Money Management.

“It’s difficult to know exactly how much because every financial planner and practice is different, but I think there’s sufficient information on the marketplace now suggesting that, on average, now the cost is around $4,000–$4,500 to service a client.”

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Given the fixed costs associated in running a compliant advice business – from paying salaries to financial planning software and platforms to licensing fees – this figure at minimum is unavoidable for most practices, the director noted.

“I think every financial planning group is doing their best to try and limit the costs where they can and are looking at different ways of doing that but you’re hitting a brick wall and there’s only so much you can do.”

As a result, advisers are often forced to double down on their more profitable clients, he observed, who are typically those with a higher volume of advised assets.

Williams explained: “Just because a client doesn’t have a lot of money doesn’t mean you can do it cheaper. It’s a relatively high fixed cost, before you might add in variable costs.

“Unfortunately, a lot of the smaller clients just fall away and very often they’ve been asked to leave because it just doesn’t make any economic sense to manage those. Then the focus becomes on the larger clients because proportionately it makes more sense to be able to service them.

“I think the days of being all things to all people have gone. The banks tried to do that when they had their financial planning businesses in place and obviously didn’t go well in the end. It’s fair to say most financial planners – the successful ones anyway – have been very selective in terms of their client base.”

Williams’ sentiment reflects the broader trend of advisers actively servicing fewer clients in favour of a more specialised client base who generate a higher revenue for their practice.

Earlier this week, Catherine Williams, head of practice management at Dimensional, told Money Management that Australian firms are “incredibly focused” on their specific client demographic.

“Australian firms are incredibly focused on their clients and who can deliver the greatest value. They are refusing to take on clients who don’t suit their firm, and being systematic and disciplined with that,” she said.

“The days of servicing non-profitable clients are gone. Firms are getting clear on what they want to provide and the service they can offer. They get to a breakeven number on what is their cost to serve and the revenue they can get, and then charge their clients accordingly.”

Regardless of which particular client segment advisers target, Williams said businesses continue to face a balancing act of justifying rising fees with the value of their services.

According to Adviser Ratings, consumers say they are willing to pay $911 on average for receiving advice, presenting a clear divergence from the median fee of $3,960 being charged by their advice firm. Research by CFS has also found consumers are eager for legislative reforms to make advice more accessible.

He continued: “If it’s costing you $5,000 to serve a client and someone’s got $500,000, well that’s 1 per cent. That starts to bite into the returns. If the average [investment] returns are now 7 per cent and you’re taking off 1 per cent, that’s a balancing act to try and justify that fee year in and year out.

“Financial planners know they can add value, but can we add $5,000 value every year? It’s a bit of a balancing act to get that through.”

As such, effectively articulating the value of advice to existing and prospective clients remains critical. A Netwealth webinar last year said this could look like communicating the tangible financial benefits of advice where possible and framing outcomes in terms of the emotional benefits, rather than keeping investment performance as the focal point.