Financial adviser profitability: The fundamentals of success

Falling profitability 

The profitability of the average financial advice business has declined and is under pressure. But there are answers to the challenge available to every willing adviser. While the traditional model is under threat, the required changes may not be as significant as you suspect. 

Over the same period, average practice revenue remained unchanged at $1.2 million. So, while advisers did maintain top-line revenue, the underlying cost ratios to sustain or grow profit were impacted. 

The report points to the direct income issue, such as the capping of life insurance commissions and implementing a new fee disclosure regime. 

Dig a little deeper, though, and the drivers are starker. 

Adviser Ratings reported that the price of financial advice rose by 16% last year. According to the Financial Services Council of Australia (FSC), the driver is the escalating cost of doing business, rather than profit-taking by advice providers.  

KPMG report that the average cost of providing advice is now $5,335.  

Furthermore, adviser numbers continue to fall. Adviser Ratings report that the number of advisers dipped below 19,000 in the third quarter of 2021 and will likely reach 16,500 by year-end.  

So, the maths is straightforward. There are fewer advisers providing services to fewer clients. They are changing more to deliver the services but at reduced margins.  

The need for change is clearly present. 

What to change 

The answers to declining adviser probability fall into three interdependent areas. 

1. Creating the capacity to scale profitably
2. Simplifying compliance 
3. Developing a compelling value proposition

How to change

1. Managed Accounts create the capacity to scale

Managed Account solutions are central to developing the capacity to scale.  

Within that, outsourcing portfolio management to full-time professional portfolio managers achieves a double benefit.  

Studies show that advisers can free up around 30% of the time to focus on client-facing, income-generating activity and reduce administrative costs. 

But not all Managed Account solutions are the same. The questions to ask are: 

• Does the solution cover both super and non-super investors?
• Does the solution enable clients' financial goals to be explicitly matched to their investment portfolios?
• Does the solution adequately manage risk/return? Goals or Outcomes-based managed portfolios can include a broader asset base to provide superior risk management within declining markets.
• Does the solution extend beyond portfolio investment products alone to include technology and reporting opportunities, which are additional keys to gaining efficiency and capacity?
• Does the solution simplify the delivery of advice by embedding the client's best interest duty and alignment with the actual investor needs? Simplifying compliance is a significant part of the answer.

Choosing the right Managed Account platform with the right managed investment solution unleashes the potential to align your business to your clients and scale profitably. 

2. A genuine client-centric approach simplifies compliance

Rising compliance obligations are focused on investor understanding and welfare. The prominent trends are ensuring that advice and investments are directly relevant to the financial needs and circumstances of the individual investor. This is very appealing to investors, not only regulators. 

There is a considerable opportunity to be realised by aligning your process and investment execution directly to the clients' needs. That is, advisers can use changing compliance obligations to their advantage.  

• Conduct advice in a manner that builds a clear understanding of investor needs and circumstances.
• Implement client investments in portfolio solutions and managed accounts that directly match their risk-return goals. 

It's remarkably simple and compliant by design.  

The first two steps outlined in this article provide the basis of a compelling value proposition. The client is very much at the centre.  

• Advice is based on a complete view of client needs and circumstances
• Investments are directly matched the client's goals
• The client better understands and engages with the advice

A client-centric proposition makes it easier to win new business and retain clients. Having a deep understanding of clients builds trust. Focusing on goals, aligning investments to goals and tracking progress towards goals creates more positive and straightforward client conversation. 

In doing so, you can simply demonstrate that Client Best Interest obligations have been met. 

The bottom line for advisers is a more valuable proposition with a lower cost to serve.  

About Dynamic Asset 

Dynamic Asset is a simple and compliant business solution for financial advisers. Established in 2013 by financial advisers, Dynamic Asset provides business solutions for Australian financial advisers and their clients through working with class-leading managed account solutions and delivering goals based investment portfolios. The portfolios are designed to meet particular investment goals across liquidity and risk-return criteria. 

The differentiated portfolios are used to manage client portfolios either individually or blended into an overall portfolio to suit their unique investment goals. The range of portfolios across super and non-super means that Dynamic Asset provides the most complete whole-of-business Managed Account solution in Australia. 

Dynamic Asset managed accounts solutions are available on several leading platforms. 

Please contact us for more information on the Dynamic Asset managed account solution.