A quarter of financial advice firms have no formal plan to navigate the education and professional standards challenges about to come their way, early research findings show.
Fewer than half (46.7 per cent) of advice businesses surveyed stated that “to some extent” they had a plan. So all up, more than 70 per cent of advice businesses have no or only some idea of how they intend to grow, whether they measure it by revenue, number of clients, funds under management (FUM), profit, or some other metric, the study, conducted by researcher CoreData in partnership with Professional Planner has found.
“Effective planning is most important and most difficult when times are most uncertain,” said Simon Hoyle, head of market insight for CoreData Research. “But to an extent, advice practices have rarely had to produce detailed business plans before – as a licensee head described it recently, ‘advisers don’t run a business, they run a revenue stream.’ ”
Hoyle is leading the PP/CoreData research project, which will include a quantitative survey of the intentions of advice practices, along with a series of qualitative focus groups to take place in coming months leading up to the final recommendations from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, expected early next year. The study aims to capture the views of financial advisers about how they expect their businesses to travel and how the industry is likely to evolve as it faces immense uncertainty for at least the next five years.
The early analysis of the quantitative data shows that, as long as revenue keeps rolling in, advisers think everything is fine, Hoyle said.
The research found that almost three-quarters (73 per cent) of advice businesses that have responded to date stated that revenue was the most meaningful measure of growth, followed by number of clients (9.3 per cent) and FUM (8.1 per cent). Less than 4 per cent nominate profit or earnings before interest and tax (EBIT) is the most meaningful measure.
“Some nominate ‘client satisfaction’ and ‘quality of advice’ – but try applying a multiple to either of those to come up with a business valuation and see how you go,” Hoyle said, commenting on the survey findings to date.
However, there are a number of reasons advice firms should be concerned about pressure revenue might come under, Hoyle noted.
“At a macro level, we’ve already seen trust in financial advice collapse during the course of the royal commission,” Hoyle said. “Before the inquiry, CoreData found that more than 60 per cent of people said they trusted financial advice (by ranking it six or higher on a scale from zero to 10, where zero is total distrust and 10 is total trust). By July, the figure had fallen to 35 per cent. Yet the Future of Advice research shows that more than eight in 10 (82 per cent) financial advice firms expect growth in the next three years to come from new clients.
“The royal commission is expected to tackle both conflicted grandfathered remuneration and the industry structures that support the subsidisation of licensee fees, when it releases its interim report later this month.
“Removing both a source of revenue – notwithstanding the constitutional issues surrounding a retrospective ban on contractually agreed-upon commissions – and industry subsidies will reduce revenue and raise for some businesses.”
Advice practices that do expect revenue to grow over the next three years expect it to grow by, on average, 28.5 per cent, the survey shows. There is also a cohort that expect revenue to decline over the next three years, and they expect the drop to be, on average, about 21 per cent, the survey found.
“This dichotomy illustrates a potential tear in the fabric of the industry, because in the coming years, both groups may in fact turn out to be right in their predictions,” Hoyle said.