Dunbar’s Number and Kitces’ Conjecture underline advice challenges

Conexus Financial’s 2022 Licensee Summit in early June laid bare the challenges that face licensees as they grapple with changing business models, economics and advice landscape.

In short, unless licensees find – and quickly – a way to shore up their financial and strategic positions, we can say with certainty there will be fewer of them 24 months from now.

We’ve already seen rationalisation of licensees, as they seek to boost the number of advisers across which they can spread the costs of developing new and better services. Some are seeking to increase that spread further still by offering support to own-AFSL firms as a separate business line.

The problem with a scale-based strategy is that overall adviser numbers are declining (from 28,000 in late 2018 to an estimated 17,000 today) and will continue to decline for the next two to three years at least. There’s a limited number to go around and it’s just not mathematically possible for every licensee to grow adviser numbers at the same time.

This licensee-adviser constraint is mirrored to an extent at the adviser-client level. CoreData’s 2022 Licensee Research suggests that most advisers are running at, or close to, full client capacity. With reference to a measure known as Dunbar’s Number, we assume advisers can typically comfortably maintain up to about 150 client relationships each. That’s close to the actual number of clients that advisers in this year’s research say they personally manage (and meet with at least once a year). And that number doesn’t change much according to the size of the advice firm the adviser works in.

Some advisers have more than 150 clients. One respondent to the Licensee Research tells us consistently that he or she has 3200 clients that they meet with at least once a year. We’re yet to actually meet this superhuman who claims to be able to hold 12 or 13 client meetings every single working day of the year. And of course some advisers, who seem predominantly to be operating in the high-net-worth space, have fewer.

The US adviser and commentator Michael Kitces reckons the “ideal” number of clients per adviser is between 75 and 125. And yet most advisers – around 90 per cent, in surveys conducted by CoreData going back several years – still say their main source of revenue growth will come from new clients.

For both of those things to be true – for Dunbar’s Number and (let’s call it) Kitces’ Conjecture to hold, and for advisers to be expecting to add new clients – then what we expect to see is a gradual renewal of advisers’ client bases. They will cease to serve lower-revenue and less profitable clients, and take on new, higher-revenue and more profitable clients in their place.

That’s why we’re starting to see low-cost, self-serve options emerging that advisers can offer to lower-value clients as a way of not cutting them off completely, and as a way of keeping these clients in the adviser’s orbit in case they should become economically attractive in future.

But the overall number of clients per adviser isn’t likely to shift fundamentally. Technology might help make servicing existing relationships more efficient, and free-up time to do other things, but it’s not clear if it automatically and inevitably allows an adviser to cultivate and nurture a greater number of significant client relationships. Dunbar’s Number isn’t necessarily influenced by how much free time an individual has.

So, not only is a licensee’s ability to grow its numbers potentially constrained by a shrinking supply of advisers, an adviser’s ability to significantly increase client numbers within a traditional advice business framework is also constrained.

This means licensees can’t all spread the cost of developing and delivering new services across ever-growing numbers of advisers. These costs must be absorbed by the licensee or passed on to those advisers they do have. At the same time, advisers can’t automatically assume revenue from onboarding new clients will grow to allow them to meet higher licensee costs.

That being so, advisers increasingly will need help and support to develop new revenue streams, but the Licensee Research suggests that so far, at least, licensees aren’t helping much on this front. Only about a quarter of advisers say their licensee has done anything specific in the past 12 months to help them grow their business.

And less than half number – about 11 per cent – say their licensee has done anything to help them with generate new income streams.

As an alternative or an adjunct to increasing client numbers, advisers can reprice their services, and there’s evidence of that taking place, but as the cost of advice increases it becomes less affordable and less accessible.

The emergence of the licensee entity as professional and business services provider to advisers and advice firms has been underway for several years. Licensing itself is now a hygiene factor and the days of attracting advisers with cheap licensee fees are over. Licensees are now seeking to set themselves apart from each other on the range and quality of the professional and business services they offer. And those services don’t come cheaply.

Making a buck as a licensee is a tough gig at the best of times, and it’s not going to get any easier in the short term. AMP has revealed that it lost around $150 million on its license businesses in 2021, and it doesn’t expect to break even until 2024. It’s not alone in grappling with how to fashion a viable business model as adviser numbers fall and the industry continues its inexorable transition to a profession.