As the adviser market shrinks and demand from retiring Baby Boomers balloons, market forces alone would predict advice fees are set to rise.
However, when you add the additional costs of being part of a fledgling profession and post-COVID catch-up, the case for re-pricing becomes even stronger.
It’s something we’ve already seen emerging in the past year. Our recent benchmarking study shows advisers’ median fees rose 16 per cent in 2020 from $2,800 to $3,256. In 2018, the median fee was around $2,510, according to our survey done to over 1500 advisers and practice principals.
Average and median fee - client fees (2018-2020) Source: AR Data
Again, the recent rise in fees is hardly surprising, given the backdrop of industry compression, rising costs and increasing specialisation. More than 8,000 advisers have exited the industry in the past two years and a further 22 per cent say they are considering leaving as the exam deadline approaches. Those who’ve stayed are telling us compliance and PI costs continue to bite into business profits.
The pressures on advice businesses have produced a somewhat predictable pattern. The shrinking pool of advisers cannot be everything to everyone, so the removal of unprofitable clients has become a bigger theme.
In fact, advisers are saying to stay profitable, they have to sideline their lower value clients and lift their fees for high net worth (HNW) clients. The average number of clients has fallen in the past two years. Conversely, the average funds under advice increased 13 per cent in 2020. This too reflects the fact advisers have rationalised their client base and are charging higher fees to the remaining, primarily HNW clients.
The scaled advice dilemma
Of course, this picture presents a challenge to clients and would-be clients who want piecemeal or scaled advice. How do advisers manage and price scaled advice when there’s increasing consumer demand, but far fewer advisers to service that demand? Our data shows “one-off” clients accounted for 20 per cent of advisers’ clients in 2020, which is unsurprising given the introduction of several new COVID support packages last year.
Both government and consumer pressure to broaden the scaled advice options is increasing, especially as Baby Boomers hit retirement age and their financial lives become more complex. There’s also a sense of duty from many advisers to help those who need guidance as they retire, but don’t fit into the comprehensive advice framework. Where do these potential clients go for advice?
By and large, fitting one-off advice into the adviser menu continues to be a challenge for businesses. We’re told despite the interest in helping clients with one-off needs, compliance and appropriate fees continue to be barriers. While ASIC has been consulting the industry on how to make affordable advice a reality, advisers will need further clarity on compliance risks before they begin re-engineering their businesses to meet broader consumer demands. In the meantime, we expect the push towards smaller, HNW client bases to continue.