The average profit margin for advice practices is 28.2 per cent according to a new study from Business Health, which dissected the books of 300 advice practices to determine the benchmark figure for practice principals across the country.
According to Business Health partner Rod Bertino the profitability figure is released as part of the firm’s Future Ready 8 report, which is updated every two years. The figure of 28.2 per cent is for 2019 and represents a slight increase on the previous result – 27 per cent in 2017.
While the next figure will encapsulate the period to 2021 Bertino says he doesn’t expect a significant drop-off in profitability due to the pandemic.
“The revenue of advisory firms has held up quite well, not a lot of adviser have lost a lot of clients,” he says. “The expense side has also been managed quite well.”
Bertino says the figure is calculated by subtracting total expenses from total revenue, with a notional $100,000 salary for practice owners.
“There’s no right way to do it,” he says. “But for us to do the benchmark we just assume every working owner is drawing $100,000 a year. We’re no suggesting it’s the right number, it’s way below market rate. But as long as we use the same number we can benchmark across profit.”
The purpose of the report, he explains, is to provide advisers with a mirror by which they can measure themselves against the market. Yet that doesn’t mean a business with a lower profit figure is failing.
“Profitability is one of the key measures in business success,” Bertino says. “It’s not the sole measure its one of the critical measures. And 28.2 per cent isn’t the right number for businesses, it’s just what the average is.”
Profit lines under 28.2 per cent can arise through perfectly valid reasons, he explains.
“If your profit percentage is lower that might be acceptable – you might above invested in people, technology or an office and therefore today’s profit is low but you expect more in years to come,” he says. “But you need to have a target, and it’s nice to know where you’re peers are.”