Riskinfo’s Annie Gray considers two very different paths down which Australia’s financial advice sector may travel, based on scenarios which have recently been projected by key industry stakeholders…
Australia’s financial advice industry is in a state of flux as minimum educational requirements and an increasingly arduous, and costly, compliance regime sees adviser numbers at their lowest level in many years.
The total number of advisers in late August was sitting at just over 19,000 – down from more than 28,000 at the industry peak in 2018, meaning that access and affordability of financial advice continues to be challenged.
So, where is the industry heading? What are the possible scenarios around the future shape of the financial advice industry?
While every adviser will have their own take on what the future holds for the structure of the financial advice sector, two potential scenarios have recently been articulated by seasoned and well-regarded industry practitioners: Wealth Data’s Colin Williams and AZ NGA’s Paul Barrett.
Barrett is looking towards a future which will include multidisciplinary super firms, while Williams is noticing that ‘small is the new big’.
In the introduction to his recent publication Build or buy: A guide to merger & acquisition fundamentals, Barrett predicts the industry will begin to see the emergence of multidisciplinary super firms in the next five to 10 years.
He writes in his white paper that the formation of super firms is underpinned by four key themes:
- Strong demand for professional advice amidst weak supply
- Attractive advice margins
- Modernisation of advisory businesses
To these four themes can be added the advantages and benefits of economies of scale associated with larger advice firms.
Barrett predicts that these advice mega firms will be akin to the mid-tier in accounting and professional services.
…the super firm strategy will be …driven by investment in the advice margin; not by investment in the product margin
He says the super firm strategy will be led by entrepreneurs; not institutions, and will be driven by investment in the advice margin; not by investment in the product margin.
Barrett believes the super firm strategy will be powered by M&A activity to enable entrepreneurs to acquire capability and capacity:
“This innovative breed of companies will shape the future of financial services in Australia,” he states, adding that AZ NGA wants to be at the centre of this evolution.
Meanwhile, Wealth Data’s Colin Williams says small is the new big for financial adviser growth.
His analysis of new and closed ‘small’ licensees for 2021 YTD found there have been more licensees closing than opening. However, he predicts there is significant growth for licensees that he classes as ‘holistic’ financial planning advisers. If they combined as one, according to Williams, they would be one of the largest licensees in the country.
Williams says that, while there is a decline in adviser numbers industry wide, this small sector, which provides life insurance and investment advice, is seeing positive numbers and is constantly growing.
In contrast, says Williams, the larger licensee group, in which the ‘owner’ has 50 or more current advisers, has contributed to net losses of 1,413 advisers in the year to date.
From William’s perspective, the small licensees with a focus on holistic financial advice will continue to grow: “It has been a trend for a while now and I don’t think it will stop anytime soon. We are seeing groups like BT, IOOF, Centrepoint and more providing services to support small self- licensed licensees,” he says.
Williams told Riskinfo that the provision of these services makes it far easier for advisers to become self-licensed than it has been in the past.
…major licensee owners …are under immense pressure to hold onto advisers
“Similarly, I can’t see any growth for major licensee owners as a whole. Sure, some will grow through acquisition and winning over some new advisers, but all are under immense pressure to hold onto advisers, while at the same time, finding it hard to recruit new advisers.” Supporting this argument, Williams cites Wealth Data statistics which reveal for YTD to 9 September 2021, of the 53 ‘Licensee Owners’ which boast 50 or more advisers, 14 have made total gains of 90 adviser roles, while 39 have seen a reduction of 1,563 roles.
Williams also points to changing regulations around minimum educational requirements, which mean the major licensees have had to let some advisers go and, in other instances, insist that any practice must have at least two advisers on board, so that should one become unable to advise, the other can take over and ensure there is no chance of fees for no service occurring.
As to where it will all settle, Williams thinks the industry (profession) will arrive at a stage where there may be around 12,000 to 14,000 advisers on ASIC’s register who, for the most part, will provide advice to higher-end clients. He says they may well be integrated with other service providers such as accounting firms, but fundamentally ‘run their own race’. Unlike many other professions, according to Williams, there is not the need for a ‘big advice business’, as advice is very personal. He says this is distinct from accounting and legal services, which can still be personal, but where the big dollars are earned by providing specialist services to large businesses.
While the industry is already seeing this, he says, there will always be place for some advisers to provide one-off advice at certain life-points to clients.
…superannuation funds have grown substantially and become dominant, but their advice channels have shrunk
He notes too, that the superannuation funds have grown substantially and become dominant, but their advice channels have shrunk. He believes they will be good at providing very simplistic advice and for many people, this will be ample for significant periods during their lifetime, that is, they don’t need a complex annual review.
“We’re still finding our way,” says Williams, “…but there is quite a bit of change still to come, particularly in the way advisers presents themselves as a profession.”
So, will Australia’s future advice sector consist of small firms or mega agencies or a mixture of the two?
The future of the financial advice industry is taking shape right now and – as a myriad of players continue to state – one certainty is that the need for quality financial advice has never been greater.