Foreign capital boosts Australian financial advice growth

Traditionally, Australia’s financial advice sector has been made up of a large amount of smaller firms. However, the past five-to-ten years has seen an influx of private equity enter the market, in particular foreign capital from places like the US.

This capital has been utilised by several firms for expansion through mergers, acquisitions and equity partnerships. A recent example of this would be Coastal Advice Group’s merger with Calder Wealth Management, which was facilitated by capital provided by the New York-based Merchant Wealth Partners.

For Forte Asset Solutions founder and director Steve Prendeville, one core reason why Australia has become an attractive market is the perceived stability.

“[Australia has a] known legislative environment, is politically stable, and has a stable American dollar relationship,” he explained to ifa. “It’s really hard to blow up these businesses.”

For foreign private equity firms, particularly in places such as the US where domestic economic uncertainty is leading to an unpredictable market, having capital invested in a stable market such as Australia provides a level of security not afforded at home.

Prendeville also highlighted that Australian financial advice businesses operate on a high level of profitability, with many in the “high 30s to 40 percentile”, opposed to the average business operating at 28 per cent profitability.

“We're getting organic growth now. The need for advice has never been greater, particularly with the exit of the bank distribution oligopolies. So, we're seeing more profitable and extremely stable businesses that are yielding good returns,” he said.

Another reason for foreign capital coming into the domestic financial advice space is because many firms are inviting this investment as it allows for easier growth.

An obvious reason for this, as Prendeville explained, is that advice firms no longer have to use their own balance sheets when looking to expand, mitigating the rising costs of operating.

“We've got a rising cost production, and so we're starting to see that in our labour costs, because the talent pool [of experienced advisers] is diminished,” he explained, with the access to this capital freeing up firms to expand and be protected from the financial risks associated with doing so.

For many firms, the expertise provided by foreign private equity groups is also invaluable when expanding.

“[Australian firms] want that corporate oversight. They want capital plus,” Prendeville explained, elaborating that once these local firms team up with capital providers, they get access to much of these providers’ internal business infrastructure.

“For instance, it could be that they've got internal HR services, they've got legal services. All of a sudden, this is where we start to look at capital plus.”

Overall, foreign capital is helping to not necessarily reshape, but reorganise the Australian financial advice sector, with firms looking to grow more than ever before. To some, this might seem like Australia’s market is moving towards a more American model, which is dominated by a select number of large companies.

Prendeville does not share these concerns, highlighting that Australia is now seeing the rise of what he calls “super boutiques”, or financial advice companies that are “independently owned, large and what we'll see in coming years, well branded”.

This is opposed to the American market, which is dominated by large aggregators that are looking to monopolise, not expand.

For firms that are looking to bring in foreign capital to help them expand, Prendeville highlighted you must understand which organisations are going to work best for your company.

“Not all capital is the same, and the capital providers have their own individual culture as well. So, when you're entertaining the idea of capital coming into your business, you really need to understand where that money's coming from. If it's coming from a fund, does it have an end date? What do they really want?” he said.

“Each have their individual fingerprint, individual culture, and you need to understand this [to make the best choice for your firm].”