‘It’s never been more profitable’: Advisers using MDAs to reduce cost of advice

Speaking on the latest episode of the ifa Show, DASH Technology Group chief executive Andrew Whelan said some advisers are seeking alternative methods to try and bring down their operational costs and increase their profitability.

“It’s almost a back to the future thing, we’re seeing advisers who are using things like MDAs [managed discretionary accounts] to cut out a lot of the value chain,” Whelan said.

“A lot of our clients and advice practices are buying new practices and just bolting them on and seeing where they can capture more margins.

“If you’re a good business with good skills, the time has never been better to make some profits out of financial planning.”

Some advisers, he said, are looking to utilise less costly investment options for their clients in an effort to reduce costs and make up losses caused by excessive regulations.

“If you can halve the platform, you do that. If you can take them out of expensive SMAs [separately managed accounts] or expensive active fund managers, they will do that and then just choose either an ETF or some Aussie stocks,” he said.

“But effectively, advisers have been reclaiming all of that wasted margin that they’re introducing and to keep the cost to client either cheaper or the same. So, one of the stats that we’ve seen is, if you can follow through with utilising an MDA so it’s really efficient, you can earn an extra million dollars in revenue for every $250 million in assets under management.

“It’s never been more profitable.”

High demand, low supply

Speaking on the ongoing issues caused by the lack of advisers, Whelan said practices are increasing their number of staff to attempt to cope with the increased demand.

“The demand for advice out there at the moment is staggering. The number [of advisers] receding as heavily as they have, there’s just way less supply,” he said.

“The way that the advisers are dealing with this, on average, is not through technology, it’s through headcount. So, they’re actually adding more management, more paraplanning, more client services, so there’s more bodies and that costs more to run your business.”

Whelan explained that the emerging generation of Australians are generally thought to prefer more robust digital offerings with their advice, meaning practices need to start investing more in technology to help them attract the next wave of clients.

“My concern is we’re just adding bodies to older style technology and we’re not really challenging ourselves with that,” he said.

“We haven’t invested enough in technology and we haven’t taken any risks in terms of how we deliver advice and now they’re not gonna be positioned to deal with a next generation and we’re not going to get lots of bites at that cherry to engage the younger cohort, the kids of the existing clients, and we’re going to walk into some trouble,” Whelan added.

“So to be clear, they’re making more money, but the cost of advice, so the accessibility of advice from a planning practice hasn’t gone down. So the cost has actually gone up with inflation, which sort of proves that we’re not achieving that mass market.”

As Australians struggle to gain access to affordable advice, Whelan said they have started to look to social media, which poses significant financial risks as they are likely unqualified and lack the understanding to give quality advice.

“The stats at the moment, which are frightening, where 37 per cent trust Reddit for financial advice. And ASIC has put something together where they did a survey in 2022 that 33 per cent of 18-to-21-year-olds, so your Gen Zs, they follow at least one finfluencer across the various platforms and have changed their behaviour as a result of the advice they’re getting on Instagram from some kid,” he said.

“People are crying out for it, but the places they’re going to at the moment are really dangerous.”