The ‘recipe for success’ of highly profitable advice firms

Financial advice practices with high profit margins charge annual client fees of $7,700 and keep operational costs low, creating a recipe for success.

Investment Trends recently revealed that the average adviser client book has decreased from 120 clients in 2023 to 99 in 2024. Strategic fee increases were cited as the main cause of this decline as advisers make a deliberate shift towards quality over quantity in their client relationships.

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The figure of 99 clients includes a client book of 15 newly acquired clients and an active client base of 84 individuals, alongside a loss of 36 clients due to fee hikes.

Client attrition levels are at their highest since 2018, when advisers lost 35 clients on average. However, this is not necessarily a negative outcome as the quality of client relationships have improved with higher engagement.

The research house identified that average ongoing fees charged per client currently stand at $5,500 per annum in 2024 – a 17 per cent jump from $4,700 last year. In comparison, advice fees were at $3,450 in 2016 when advisers serviced an average of 132 clients.

While advice practices had large client bases eight years ago, average fees being $2,000 lower meant businesses were less profitable in comparison to current profit margins.

Irene Guiamatsia, head of research at Investment Trends, noted the distinct rise in advice fees over the years has come as a result of advisers more appropriately valuing their services and higher education qualifications.

Since the Hayne royal commission, the advice sector has taken steps to become a profession like the legal or accountancy profession.

“What has driven the change right now is that advisers are seeing their value proposition differently and actually matching what they see as their value with a higher commercial value,” she told Money Management.

“We’ve heard financial advice being compared to legal services, in terms of the expertise that they have which is being sold. Advisers are recasting their value proposition and focusing on the expertise they are offering. Just as when you go to a lawyer, you expect counsel and someone to look after your best interests. That’s how advisers are increasingly reframing their value proposition, which comes with a different commercial arrangement or value ascribed to it.”

Last year, Keith Cullen, founder and managing director of WT Financial, argued that advisers are significantly short-selling themselves by up to 50 per cent and should be charging more for the level of work involved in the advice process.

In particular, Investment Trends discovered that higher client fees are charged by those advice practices with greater net profit margins. Firms with a profitability of 40 per cent or more charged upwards of $7,700 per annum.

Those with profit margins of 20–39 per cent reported annual fees of $6,500, practices with 1–19 per cent profitability charged fees of $4,200, and firms that were unprofitable had fees of $3,400.

Consumers say they are willing to pay $911 on average for receiving advice, according to Adviser Ratings, presenting a clear divergence from the average fee of $5,500 per annum being charged.

Guiamatsia explained: “Advisers that were at that really high level of profitability did charge more, but what they also did particularly well was keeping a lid on operational costs.

“They are doing everything they can, including leveraging technology, to actually streamline the production process and reduce their operational cost.”

This dynamic of charging higher fees and effectively managing business costs creates a “recipe for success” to achieve greater profit margins, she said.

Targeting HNW clients

A key piece of the profitability puzzle is that advisers are increasingly looking to service mass affluent and high-net-worth (HNW) individuals as the core part of their client base, who can afford an annual fee of $7,700 or more.

“When we ask advisers the typical type of client that they’re looking at acquiring, it tends to be those with $250,000+ in assets. If they have a client who doesn’t have that level of assets, then advisers are estimating that it’s probably not going to be worth their while and not affordable for the client as well,” Guiamatsia acknowledged.

“For the minute, advisers are very hesitant to engage with the mass market segment on the lower end of the spectrum.”

But with the vast majority of HNWs looking to pass down their funds in the upcoming intergenerational wealth transfer, the head of research encouraged advisers to also build relationships with younger recipients or risk seeing a reduction in client numbers.

“Many of those HNWs are at that certain life stage where they’re about to move into decumulation, meaning they will take their money out of the system. So advisers need to replenish the client pipeline and really look at the younger end as well,” she said.

“Advisers should have started yesterday in preparing for the intergenerational wealth transfer if they haven’t already. About 95 per cent of HNWs say they will transfer their wealth to the next generation. Advisers should look at supporting that transition which we’re already seeing play out. If they can build a relationship with the younger family members, then that solves the client acquisition problem.”