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Regulatory cost squeeze to benefit advisers

The current cost squeeze at all levels of the advice value chain is likely to benefit advisers in the long run if they can rapidly restructure their businesses to adapt to new revenue models, a platform provider has said.

Addressing a Wealth02 media lunch on Wednesday, the group’s chief distribution officer Andrew Whelan said following recent industry commentary about the blow to valuations caused by the move to flat fees, planners had a significant task ahead of them to re-engineer their businesses for future profitability.

“To retain value, planner practices are going to have to run at 40 per cent EBIT - that’s a big number for what is a service business, to get the same valuation which used to be based off recurring revenue,” Mr Whelan said.

“Research suggests planner practices vary in terms of EBIT from five per cent for the smaller one man bands to between 25 and 30 per cent for larger practices. So even the larger ones have got to shift by maybe 10 per cent - this is a genuine challenge for people who have been working their whole lives to build this asset.”

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Wealth02 executive director Darren Pettiona, who co-founded HUB24, said while many practices had been upended by changing regulatory and industry dynamics, those who came out the other side were likely to be able to command higher margins and a more satisfied client base.

“I’ve been saying for ages, why is it the adviser has the whole control of the client relationship, the insurance liability if it goes bad and the reputational damage, but they get 10 cents in the dollar and the platform and institution get 90 cents - it didn’t add up,” Mr Pettiona said.

“The destruction of the vertical model is a good thing, because as they become more independent advisers can look for the best alternative for their clients, so you might see the professionalism go up and the acceptance by clients going up as well. That will attract a younger generation coming through underneath and really build it out as a profession.”

Wealth02 chair Neil Roderick, a former chief operating officer of Macquarie’s banking and financial services business, said the exodus of advisers represented an opportunity and a challenge for those remaining, given the rising demand for advice they needed to position their business to cope with.

“There is a decreasing number of advisers in the industry even though the industry has grown in [dollar terms],” Mr Roderick said.

“That means the remaining advisers have to get a lot more efficient and hopefully grow their number of customers. What it may also mean is in a few years’ time we might see younger, more qualified advisers coming through on the back of some of the university courses, because it will become a more attractive industry to be part of.

“Particularly if you are independent minded, because you don’t have to be part of a big institution working your way through the grades.”

Regulatory cost squeeze to benefit advisers
Andrew Whelan
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