Underinvestment, not a skills shortage, to blame for capacity constraints

If done well, M&A has the potential to deliver scale and solutions for succession, human resources and business growth.

However, despite M&A activity increasing the size of advice businesses, it is not solving the industry’s capacity problems.

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Falling adviser numbers and the global skills shortage are only partly to blame.

Often, capacity constraints are also related to inefficient systems and processes, and underinvestment in technology.

This is reflected in the Dimensional 2021 Global Advisor Study, which found that fast-growing advice businesses run lean operations, with around half the number of employees of slow-growing firms, yet they boast twice the number of clients per senior adviser and make around 40 per cent more in fees.

Their higher capacity and productivity is attributed to strong organisational structure, specialised roles and greater use of digital technology to drive efficiencies, fill their pipeline and generate leads.

While there is no question that the advice industry must find a way to attract and retain talent in order to help more people, there is no short-term fix.

The Dimensional study presents a compelling case for greater investment in technology to create capacity and manage growth.

This is particularly relevant in light of Treasury’s recently released Quality of Advice Review (QAR) consultation paper.

Released in late August, the QAR consultation paper contains 10 radical proposals for improving advice accessibility and affordability.

If implemented, it will be easier and cheaper for advice providers to give personal advice to the 41 per cent of Australians who intend to seek it in the near future.

There are currently millions of unadvised Australians marching quickly and aimlessly towards retirement. They are the focus of Treasury’s QAR alongside industry’s compliance-burdened advisers, but there’s another important cohort that stands to benefit from Michelle Levy’s proposed reforms.

C&D clients could finally be liberated from costly, outdated and unsupported products.

For decades, too many C&D clients have languished in legacy products, despite the availability of much better, much cheaper solutions.

The average practice is too scared and under-resourced to move them because a recommendation would require at least one meeting and a lengthy Statement of Advice (SOA), estimated to cost around $3,000 per client.

Given the small size and limited means of C&D clients to pay a fee for service, it has been easier to do nothing.

But doing nothing is not an acceptable, long-term option for investors, advisers or the regulator. There are significant risks attached.

Treasury is proposing to slash the compliance burden, including abandoning SOAs (unless requested by a client), presenting an opportunity for advisers to give simple personal advice.

Treasury’s proposed reforms also aim to foster innovation and new forms of advice, including digital advice solutions.

In order to capitalise on opportunities borne from regulatory change, capacity will be critical.

M&A can be an effective way to bring in talent, acquire better systems and processes, and achieve growth, but it is not an economical or practical solutions for most.

For the majority of businesses looking to grow, technology will hold the key. Until such a time that adviser numbers can be replenished and materially increased, it may be the only key.

Every business should be taking steps now to up their use of technology. Even a small, incremental investment can yield returns.

Nigel Baker, founder, Scientiam