Industry contraction experienced over the past year has slowed. By end Q1 2020, the adviser population has reduced to 22,893 as shown in Figure 1, representing a net decline of 678 advisers (2.9%) from end 2019 and, on a pro-rated basis, 25% below the overall adviser reduction (16%) experienced last year.
With the economic impacts from the pandemic mostly post March, it will be interesting to see how this affects adviser intentions in coming months. The pain and suffering of small advice businesses already struggling with commercial pressures in part from regulatory overload, compounded by work-from-home inefficiencies and client financial distress brought on by COVID-19, may prompt higher attrition from the industry. Balancing that, the industry including super funds are reporting a huge spike in demand for guidance around issues like early release of superannuation that could become the saviour of some advice businesses.
Whether this COVID-19 inspired demand can postpone, or reverse, adviser decisions around exiting or switching licensees remains to be seen. The preliminary results from the first few weeks in April points to a further marked slow-down in adviser movements, although we caution reading too much into this because ASIC as-reported data for this period still needs conditioning.
The adviser exits from the industry and the continued long-run trend of the radical mass privatisation of the licensee market ensures that the institutionally owned and aligned sectors have shrunk even further in absolute terms, falling by a combined 595 advisers over the last quarter, now representing only 8,586 advisers or 37.6% of the total market (down from 39.0% at end 2019).
The privately owned sector has also shrunk in absolute terms by 1,452 advisers and 9% over the past fifteen months since the industry peak in December 2018, although at a considerably slower rate than for the overall industry (reduced by 5,128 advisers and 18%). Nevertheless, considerable activity is occurring here as advisers continue their merry-go-around of movement between privately owned licensees. This seemingly natural phenomenon of transience, with many advisers making multiple moves in a few short years, is driven by rapidly changing business conditions and shifting risk appetites from both advisers and licensees. The period post Royal Commission delivered major regulatory reforms that translated into licensees upgrading their value propositions, refining their notion of a preferred practice or adviser, increasing compliance obligations, and raising licensee fees. Unsurprisingly, in the midst of so much change, many advisers and licensees continue to search for the perfect match, with advisers in particular looking for the right balance of support, independence, and profitability.
Given the dominance of the privately held licensees, we have further segmented this sector in order to better track future market developments (see Figure 2). The 30+ adviser category, now easily the largest licensee category at 7,152 advisers (equating to 31% of the total market), has been split into 31-100, 101-200 and 200+ adviser segments.
Of these, almost half are captured in the 200+ adviser category which represents 3,293 advisers and 14% of the total market. For now, approximately half of this category is represented by the large accounting origin licensees, namely Count and the suite of licensees under listed financial services company Easton Investments.
In these economically challenging times, we are likely to see a flight-to-safety as advisers favour licensees with greater scale and stronger balance sheets. For many, this “safe haven” may be quite appealing for those from institutional backgrounds who have since experienced the white-knuckle ride of their own self-licensed boutique. Having said that, these same licensees will be judged by how they leverage that scale to support advisers with services that help them grow their business and manage compliance. Arguably, this flight-to-safety theme was already emerging through the worst of the regulatory driven disruption in 2019. While too early to tell from the Q1 2020 numbers, we anticipate a growth over time in the volume of advisers gravitating to the largest privately owned licensees. Of course, the stronger licensees must be prepared to accept more advisers; there are reports that some licensees have reached a self-determined capacity, or are being extremely selective in any incremental growth.