Half of Australian advice businesses are in poor health, contributing to a significant drop in profitability over the last two years, according to the latest report from Business Health.
Business Health said the results were particularly concerning when compared to the market results in 2010, when just 25% of practices were classified as unhealthy, and more than half the firms reviewed (60%) scored very highly against the best-practice benchmarks.
Of particular concern, according to Business Health, was a drop in average practice profitability, which fell from 28.5% in 2010 to 14.8% in 2012. This was despite a significant fall in practice expenditure (down over $300,000 in 2012), and a reduction in the average number of staff employed in the practices (4.6 in 2012 compared with 7.9 in 2010).
“The biggest expense in a practice is staff,” explained Business Health’s Terry Bell. “So if you’ve got an adviser running a business where assets have dropped, revenue has dropped, and they’ve got to maintain some cash flow and profit, the first place they look to reduce costs is with their biggest expense – their staff.”
Colleague Rod Bertino added that in doing so, practices were in danger of slipping back into non-best-practice behaviours: “There are less people, therefore the principal must be doing some of the ‘other stuff’, which is taking them away from the things they need to do at a strategic level – like planning, succession implementation, centre of influence development – because the ‘stuff’ has still got to be done.”
Mr Bell also pointed to an element of complacency from some practices, saying that some may have used the lack of clarity around the Future of Financial Advice (FoFA) reforms over the past two years as a convenient excuse not to do much work on the business.
Things that were being done well are not being done anymore, and profitability is the price practices are paying
“FoFA’s been coming for a long time, and whilst the detail is now crystalising, the high level stuff that it talks about has always been there,” Mr Bell said. “Things like transparency, fees, opt-in; those things are sound principles that you could have been thinking about two years ago – why are you waiting until now to do something?”
According to Business Health, unless proactive, remedial action is taken in the short term, the owners of the practices which are in poor health will suffer from poorer client retention, and an inability to leverage existing clients to drive revenue, ultimately culminating in lower than anticipated practice values.
“What’s happened is things have been ‘let go’. And when that happens there’s an emergence of non-best-practice. That’s why we’ve seen the results slip from more ‘fit’ to more ‘poor health’ practices over the last two years. Things that were being done well are not being done anymore, and profitability is the price practices are paying,” concluded Mr Bell.
Background
The results are incorporated in Business Health’s latest Future Ready report, the fifth in the series which have been compiled since 2002. The report, which provides an insight into the health of the Australian advisory profession and its preparedness for the future, is based on Business Health’s Health Check data, collected from more than 300 practices.
