Some 92 per cent of Australian financial advice firms are not charging enough for the service they provide to their clients.
That’s the claim made by the Rob Jones, the principal of pricing strategy firm Peloton Partners, which has undertaken pricing audits on around 600 financial advice firms in the last 13 years.
In a webinar hosted by Netwealth on Wednesday, Jones revealed that 87 per cent of advisers’ clients needed a fee increase, while only just eight per cent were paying about the right fee.
Jones said about five per cent were paying too much for the service they were receiving.
Advice firms have copped significant increases in expenses due to the outcomes of the Hayne royal commission, wage inflation, technology and licensing cost impacts, and clients should be paying their “fair share” for receiving financial advice, he added.
He told the audience that finding a right and fair fee that includes a fair return to the firm is an increasingly complex process. He regularly sees pricing, value and profit mismatches when reviewing Australian advice firms, and righting that can be complex work.
Jones said the average health of a financial planning service in Australia, regardless of its age or size, had experienced wild profit fluctuations throughout Peloton’s pricing reviews.
According to Peloton data, the average fee charged to a mass market customer is about $1400, while emerging affluent clients are charged on average $4300. Established affluent clients with more than $1 million funds under management are charged around $15,100.
“There are definitely clients that are well above or below those figures, depending on their circumstances,” Jones said.
“Most advice firms are in effect not making the level of profit that they should be, or are being too conservative on their fees and are not passing on reasonable expenses and increases to their clients on a regular basis.”
He reveals that the firms he has reviewed have an average profit of 25 per cent EBITDA (earnings before interest, taxes, depreciation, and amortization). Once you take out tax, the financial return to owner is around 15 to 18 per cent, which Jones said is nowhere near a sufficient margin for a small business offering what is a fundamentally risky service.
“Our simple objective is that profit margins are bought much closer to 40 per cent, which is what’s needed to run a business these days given the challenges involved in running a financial services advice service,” Jones said.
Adaptive pricing methodologies that tier clients based on their needs are ideal given that the industry isn’t static, particularly given that the costs of doing business is constantly changing, he added.
He also urged firms to reprice every two years, saying they run the risk of missing out on considerable profit if they don’t. He also mentioned that salaried employees wanting more money need to better understand the ever-rising costs that advice firms are facing.
He advised firms to understand their strength in the market and play to them.
“We’ve got a firm on our books at the high end of complexity that targets a group of Australians that sit at a certain wealth level, and we put in place a pricing framework for them, and their average price for service is $45,000 – and that’s just an average,” he said.
Advice firms should provide written evidence of the services provided to clients, which he says can be a powerful validation of the fees charged to clients.
“The minute that clients feel that value isn’t being provided anymore, they start to think about cost of the service, and that’s when they are starting to unbutton the advice they have been provided with,” Jones said.
“Most clients forget the great advice moments that their adviser and the firm has achieved for them, and they forget it very quickly, and sometimes they need to be reminded so the remember why they should continue to invest in themselves and their future.”
When increasing fees, he urged advisers to be confident in the numbers, the process and the inputs into the price.
“When you know that the price increase is fair, that leads to conviction, which makes it easier for advisers to competently handle a fee discussion with their clients,” Jones said.
