Irene Guiamatsia

The average profit margin has slightly declined over the past year, but self-licensed practices are reporting increased results, according to data from Investment Trends.

Data from the researcher’s 2023 ‘Adviser Business Model Report’ provided to Professional Planner showed the average profit margin declined slightly from 27 per cent in 2022 (covering FY21) to 24 per cent in 2023 (covering FY22).

On a sub-sector basis, “Aligned advisers” (defined as practices aligned with a large corporation with other business lines) saw a reduction in average profit margins from 30 per cent to 25 per cent.

“Majority independent” (defined as independently operated practices under the umbrella of a financial advisory specialist) dropped from 27 per cent to 22 per cent.

Both contrasted with the average self-licensed firm which saw profit margins increase from 25 per cent to 26 per cent.

Across all channels, only 3 per cent of practices reported profit margins higher than 50 per cent, although almost a quarter (23 per cent) stated they did not know what their profit margins were. Only 4 per cent stated they were not profitable, down 1 percentage point from the year before.

Research from Iress and Business Health released in July found the average practice had an profit margin of 27 per cent.

“What we’re seeing is there is a consistency in how those self-licensees are actually growing their bottom line,” Investment Trends head of research Irene Guiamatsia tells Professional Planner.

“It’s consistently growing whereas for the other groups [they’ve] had better results the years prior but that’s deteriorating and it’s actually changing quite quickly. That’s perhaps reflective of the state of flux, if you will, in which we see some of those in some of other planning groups.”

Overall, 23 per cent of practices stated they were less profitable over the past year, as opposed to being unchanged (38 per cent) or they were more profitable (also 38 per cent).

Some 21 per cent of aligned practices said they were less profitable, compared to 22 per cent of majority independent and 26 per cent of self-licensed firms.

Rising fees and costs

The research found the cost to produce advice has risen 9 per cent from $3280 in 2022 to $3580, but advisers have increased their up-front fees by 25 per cent (now $4000) and ongoing fees by 18 per cent (now $4700).

Guiamatsia says the steeper increase in upfront fees has helped practices to take on more clients.

“They’re seeing that client acquisition is almost like a worthwhile exercise because they’re not losing on that upfront component anymore,” Guiamatsia says.

The average number of active clients per adviser has risen to 120, up from 113 a year ago, but practices with growing profit margins had the largest client books, averaging 143 clients.

“Advisers are finding themselves having to service expanded books and are willing to take more,” Guiamatsia says.

“We think that’s the case because we’re looking at the degree to which they’re investing in technology to actually increase efficiencies of their practices.”

QAR and the cost of advice

When it came to advisers’ perceptions of the benefits of the Quality of Advice Review, 83 per cent said streamlined fee consent will have a positive impact for business.

However, only 57 per cent said “SOAs to be provided only if requested by clients” would be a positive for business, along with 47 per cent who believed going from Best Interest Duty to “good advice” would be of benefit.

Source: Investment Trends.

The government announced its QAR response in June, which included simplified disclosure documents and streamlined fee consent renewal.

Consultation on the future of SOAs is expected later this year, with Jones having expressed a preference for compulsory, but shorter SOAs.

The recommended “good advice” standard hadn’t been picked upb y government, but Jones has given the green light for super funds to give more advice with the parameters yet to be set.

Only 15 per cent of advisers surveyed by Investment Trends said super funds giving more advice would be a positive for their business, with 53 per cent stating it would have a negative impact.

While the QAR changes may help streamline advice practices, Guiamatsia says the jury is still out whether advice practices are willing to take on more clients or reduce fees if the cost to produce advice falls.

“[They] have actually made the positive decision to increase their fees and have been able to articulate that value proposition better to clients so that clients were on board,” Guiamatsia says.

“With that recent history I just have a bit of trouble seeing advisers then walking that progress backwards and charging lower fees.”

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