A tightening supply/demand dynamic, the modernisation of SMEs, fragmentation and the increasing desirability of the advice margin are driving forces for system change in the advice industry and look set to remain so for “the foreseeable future” according to AZ Next Generation Advisory chief executive Paul Barrett.
Speaking on a panel at the recent Professional Planner Best Practice Forum, Barrett said it’s been a “pretty stressful” time for business owners over the last two or three years.
Regulatory pressure and the shadow of the royal commission can give the impression that the industry is facing more headwinds than tailwinds, he explained. But as the head of a company that invests directly in advice businesses, his view is that it’s actually a good time to be an adviser.
For one thing, the balance of demand and supply has tilted dramatically over the last three years, with supply dropping by 30 per cent since 2019 as advisers have left the industry due to business pressures or the education mandate. On the demand side, Barret said the pandemic has pushed consumers towards wanting more of the security and surety an adviser provides.
“COVID has unnerved people,” he said. “No one in the world is immune to the unnerving possibilities that COVID presents and the thoughts that go with that, and humans needing to seek counsel or seek advice is manifesting into the phone ringing in the adviser or accountants’ office.”
Even more important than the supply and demand equation is the rapid modernisation of the advice businesses themselves, Barrett said. As weaker businesses have left the industry, the ones that remain have more modern, robust capabilities that are generally better positioned for the future.
“SMEs can’t just be cottage industry, family businesses anymore… they need a client value proposition that [involves] sharp capability, capacity, project management skills, organisational design brand, all of these things are suddenly becoming very important to SMEs.”
Fragmentation and control
As advice modernise they’re seeking partnerships with like minded outfits, which leads into the third force Barret identified as driving the industry: fragmentation.
“If you go back three years, advisers have always attached themselves to platforms and product manufacturers that ultimately got owned by banks and got solved and all the rest of it. But I don’t think advisers are going to rush back to platforms and fund managers as their key partners in the advice of the future,” he said. “In fact, I think the opposite is happening.”
Institutions have their work cut out winning over SMEs in the new world where services are sold on their merit, he said.
“Planning firms are getting their own licences [and] they’re looking to disintermediate platforms, because they don’t like the fact that platforms now control their revenue through simulation,” he said. “There’s a lot of reasons why I think fragmentation is a trend and not the other way around.”
The advice margin
The fourth driver identified by Barrett was that more well-capitalized entities like AZ NGA are entering the market, attracted by the potential of an advice margin that can attach itself to the funds flowing into our $3 trillion superannuation system.
“There is not doubt that the advice margin is really, really prized,” he said. “It’s very valuable.”
With grandfathered commissions banned and egregious vertical integration under tighter regulatory scrutiny, Barrett believes the advice margin itself is the key focus for acquirers.
“Organisations are changing their models to access that advice margin, they can’t get the product margin by being vertically integrated anymore. So the value of the advice margin has become really, really attractive, which is why you’re seeing a number of capital suppliers like us come to the market wanting to invest in the advice margin.”