Consultants Business Health have pegged $3,558 as the average revenue per client in the 2020 financial advice landscape, giving financial planners a new benchmark with which to gauge their revenue management.
Amidst increasing compliance and licensing costs, a floundering professional indemnity market and the retreat of grandfathered commissions from advice revenue books, the figure of $3,558 represents the average level advisers need to be remunerated annually per client to run their business.
According to Business Health partner Rod Bertino, the new benchmark can also be used by advisers as a starting point to look at their own average revenue per client and decide whether it’s appropriate given the level of service provided.
“There’s no one right number, each business needs to understand their cost to serve and whether they’re charging at the right level with an appropriate profit margin,” Bertino tells Professional Planner.
Being above or below the industry average doesn’t correlate to an adviser’s value proposition being necessarily better or worse, he says. There are many different levels of service provided depending on a host of practice variables, which gives consumers more choice and allows more people to receive advice.
“Cost structures are also really different from business to business,” Bertino adds. “Some might be able to build a level of service for less cost through technology or something like cheaper premises. Each practice needs to understand what’s behind their own number.”
The partner explains that the research was undertaken over two years leading up to last month. A mixture of revenue models and financial advice types was incorporated, he says (“from niche specialists through to holistic advisers”) but no salaried advisers were included.
A high benchmark
Bertino says this is the first time Business Health have formally tracked average revenue per client.
While some might view $3,558 as a high benchmark – 150 clients at this level would equate to over half a million dollars in revenue per adviser – Bertino says a major contributor has been the exit from the industry of less profitable advice businesses, which can be partly attributed to higher costs across the board.
“The costs to deliver has got to a point where the profitability around smaller clients and smaller client books is questionable,” he says. “For example, in our latest analysis the profitability is less than ten per cent for practices with less gross revenue than $500,000. There needs to be a certain level of revenue to deliver an acceptable return as costs increase.”
In 2019 the Financial Planning Association commissioned researcher CoreData to conduct a similar survey; CoreData came to an even higher figure of $3,757 per year for ongoing advice.
“While each practice is unique in terms of their pricing and costs structure it’s hard to understand how an advice business can profitably provide the service they are if they’re not charging that number,” Bertino says.
The view from above
The rising cost to serve for advisers and attendant increasing cost for consumers are being touted as a major concern by policymakers, with Senator Jane Hume saying recently the government needs to “bring down the cost by making financial advice simpler”.
After ASIC commissioner Danielle Press put some of the blame on high compliance costs back on ‘conservative’ licensees, advisers hit back, saying the regulator was “disconnected” from the reality of advice provision.
Advisers are fearful of regulators, said Presidio Group principal adviser Jason Cook, and are being forced to raise their prices to keep up with the cost of compliance.
Cook said his firm recently increased their price 15 per cent “across the board” to accommodate bloated compliance costs, which not all their clients stuck around for. “We’re just going to have less clients and the clients we have will be charged more,” the adviser added.
The government has charged the Australian Law Reform Commission with assessing the efficacy of financial services regulation and the costs therein, with a consolidated report due in November 2023.