It’s probably no surprise the cost of doing business for professionals in wealth management is going up, considering the increasing compliance imposts following the Hayne royal commission. The increasing cost of being an authorised representative is a case in point.
Individual advisers are paying $43,400 a year on average to their licensees, according to CoreData’s latest research that measures adviser intentions. For the majority (57.6 per cent), the cost of being an authorised representative was less this time last year, three years ago (63 per cent) and five years ago (58 per cent).
One by one, licensees are repricing their offerings in light of Hayne royal commission findings and the subsequent landmark final report, which calls out conflicts of interest embedded in dealer group models used by institutions to distribute investment products which are funded by margins.
While many existing licensees might say it’s a struggle to get advice firms to pay more for their services, the survey data and experts in the field are increasingly finding that advisers are willing to pay more for the right services.
“I think there is a massive revenue shift under way,” says Rob Jones (pictured), managing director of consulting firm Peloton Partners, speaking at the recent Professional Planner Licensee Summit in the Blue Mountains.
The revenue shift Jones describes is the shift licensees and advice networks are making away from product revenues and rebates, towards revenues generated by fees paid by advice businesses.
“The problem is many existing licensees aren’t helping enough or are not offering some of the services that practices need – especially around project management services… supporting advisers to genuinely implement initiatives is emerging as a need in our view because advisers don’t always have the expertise or time to fully implement initiatives they need,” Jones says.
“People say you won’t get advice firms to pay for services, but if you can deliver something they want and add value to their practices then my experience is they will pay for it,” he says.
Tolerance for fee increase
The rising cost associated with the increase in authorised representative fees is unlikely to take many in the industry by surprise, the CoreData research shows.
“There’s actually a reasonable amount of price increase tolerance among advisers,” Simon Hoyle, CoreData’s head of market research, says.
On average it would take an increase of almost a quarter (24.5 per cent) by advisers’ current licensees to prompt them to switch to a new licensee, according to the research.
Unsubsidised AR services can cost licensees between $38,000 and $50,000 per year per adviser, according to Jones’s own benchmarking based on more than 300 advice practices with varying sizes between one and 200 advisers.
However, just because advice practices have tolerance for an increase in AR fees, it doesn’t mean they’re not challenged, Jones points out.
According to Jones’s benchmarking, the average financial planning firm delivers a 26 per cent normalised EBITDA margin, half of which is derived from upfront advice fees, the remainder is grandfathered commission, product rebates and the like.
“If you take away the component they can’t control and they’re left with a margin of less than 10 per cent at best. A lot of advice businesses out there really are quite sick when you strip it all back,” he says.
Like advisers, licensees will need to start freeing themselves from revenue-sharing arrangements that are unlikely to continue if policymakers and regulators act on findings from the Hayne royal commission, Jones points out.
While licensees have traditionally covered their costs – and some have made a profits through revenue splits with their advice practices and deals they’ve done with technology providers and platforms – the emerging licensee model will see them deriving the vast majority of their revenues from fixed fees charged to representatives, Jones says.
Get what you pay for
Just over a quarter (25.6 per cent) of advisers surveyed by CoreData pay a variable percentage based fee to their licensee, while 29.7 per cent pay dollar-based fixed fee. More than a third of respondents (35.9 per cent) pay a fee combining fixed and variable components; meanwhile, a small number (2.8 per cent) hold equity in the licensee entity, the research shows.
While advisers will need to pay up for services, the quality of those services is likely to improve thanks to a proliferation of so called dealer to dealer services in the market.
BT Open, NAB Connect, Affinia, IOOF’s ‘Alliances’, Centrepoint Alliance, Clearview’s La Vista as well as more established dealer to dealer services provider, AMP’s Jigsaw all have dealer to dealer services in the market competing for relationships with advice firms.
Indeed, advisers rank quality of technology and compliance support as the two most important factors which are divisive in whether they’re likely to switch between licensees, CoreData’s research shows.
About six in 10 or 57.5 per cent of advisers asked about loyalty to their licensee say they’re currently unlikely to consider switching, while almost a quarter (22.4 per cent) of advisers say they are highly likely to switch licensee in the coming 12 months, the CoreData research shows.
Adviser technology and compliance support are the two factors advisers seem to value the most, the CoreData research reveals. Advisers also nominate education and training (31.1 per cent), product independence/choice (29.7 per cent), acquisitions and succession (28.4 per cent) and technical services (27 per cent) as contributing factors in making a decision to switch or leave a licensee.
Increasingly, licensees are finding the competitiveness of their offering hinges on the quality of their services, a notion supported by the CoreData research, which found that only 8 per cent of advisers said a licensee’s brand would make them consider switching
Despite the challenges advice businesses face we’re also finding many of these practices are willing to pay for services that genuinely add value to their businesses.