Is it still profitable to operate an advice firm?

Recently, the financial services industry has voiced frustration at the piling costs of levies that have been placed on them with the increase of the Australian Securities and Investments Commission (ASIC) levy and the introduction of the Compensation Scheme of Last Resort (CSLR) levy that will leave advisers around $4,000 out of pocket.

Speaking on a recent episode of the ifa Show, founder and director of Forte Asset Solutions, Steve Prendeville, said advice businesses are still profitable despite the added costs.

Referring to many advisers’ concerns about the rising cost of business, Prendeville said although some aspects have become more expensive, he believes, overall, it has started to balance out.

“There’s elements of it that are increasing like the levy, but more importantly, it’s actually the cost of labour is now the significant one,” he said.

“What’s happening at the same time is fee structures are also moving and they’re moving by at least CPI. So, I’m actually finding that the costs are starting to balance.

“We had some reduction in some areas. PI, for instance, has certainly plateaued, if not dipped, as we’ve got more options of return to the marketplace. And so, I think that yes, there’s a cost increase but at the same time we’re seeing revenue increases.”

According to Prendeville, cost increases for consumers have helped balance out the increases for advisers.

“When we look at profit margins, the average is somewhere around 24 per cent but I’m seeing so many more businesses that are at 35 per cent or more and this has come with fixed fees,” he said.

“It’s also that they know their margins and each client is now profitable. I think we’ve had a period of time over the last three or four years where we’ve had cost increases but at the same time we’ve had price increases as well.

“So the equilibrium, the margin I think, is starting to be quite constant.”

Following the trying economic times from COVID-19, Prendeville said businesses can now start to build on the foundations formed during that period.

“The businesses have also started to, with the confidence that’s returned to the market, they’ve started to reinvest back into the businesses as well,” he said.

“Particularly over the COVID-19 period, they probably built their balance sheets much like Australian households did and now it’s a time where they’re investing back in the business.

“So yes, there’s still cost pressures but I think that’s probably less today than there would have been 18 or 24 months ago.”

Although he expressed some positive attitudes about the advice industry, Prendeville said that consistent shifting around compliance and talent acquisition and retention has meant that businesses are still being run manually.

“As much as I’d like to be [optimistic], it’s the labour costs that are coming in, it’s maintaining people, the right people for the right jobs. It’s this reinvesting back into the business, be it systems, processes or people,” he said.

“And I don’t think any business owner at the moment is on autopilot. It is that it does require significant management even just to maintain status quo.”