Why financial advisers may not want your money

For years, the financial advice industry has been shrinking. At the same time, the fees charged to investors have been going up.

And it’s always been the case that you need to bring money to the table when it comes to financial advice – at least you must present a set of circumstances that promise a profitable business relationship in the future.

What we did not know until recently is that it’s not about whether you can afford the adviser. We now know from industry insiders that it’s about whether the adviser can afford to do business with you.

Key reports from the consultants who help advisers to sell their financial advice operations reveal that advisers who don’t charge at least $3000 a year are in trouble.

In a circular to financial advisers in February this year, Centurion Market Makers warned any financial adviser seeking to sell their practice: “It is very difficult to service a client with a fee under $3000 per annum – clients below this level generally detract from value … if they can be sold at all.”

A second consultancy, Radar Results, confirms the large amount of money that advisers now need to make from your account. Radar Results suggests the buyer of a financial advice business will look at the client list and ”the most requested clients are those paying fees between $4000 and $8000 per annum”.

Put simply, financial advisers must make a profit if they want to sell their business in the future – and if you pay them any less than $3000 a year, they may not be able to sell their business as a going concern.

How did this come to pass?

Behind the scenes, the financial advice sector is splitting in two. There is a future for entry-level automated advice and an even better future for customised high-fee advice.

Unfortunately, many ‘mum and dad’ investors don’t fit neatly into either category.

To use the low-cost, low-touch entry level operators, the investor needs to be happy with an off-the-shelf relationship. Newer entrants in the market such as Vanguard and Stockspot are creating viable business offerings at this level.

Meanwhile, to access the upper levels of the advice market, you need deep pockets.

What’s more, it’s clear from a string of recent deals that uptown advisers are becoming very attractive operations where well-heeled clients attract global capital. Recent deals with top names such as Escala Partners, LGT Crestone or Mercury Private have seen a new wave of international money enter the market.

Key issues shaping the Australian market

First, the industry has been hollowed out – the exit of the major banks from the space some years ago after a string of scandals left a diminished talent pool. The Australian recently reported that there are now only 15,488 advisers in the market. The numbers have dropped every year. Back in 2019 when there were 25,000 advisers.

Second, the industry has always struggled with the simple issue of ‘face time’. Advisers can only meet so many people a day. Video calls have improved productivity but time pressure remains an issue.

Third, an ocean of red tape and compliance legislation that has emerged over the last decade means an enormous amount of time – and a significant chunk of the fees that you pay – are not directly related to the provision of financial advice.

What to do?

Most Australians would benefit from financial advice, but often they only require limited advice for certain situations such as inheritance or redundancy.

In contrast, the advice industry rarely seeks this business – such one-off arrangements can be loss-making. Most advisers want wealthy clients who are willing to pay ongoing large fees every year.

It’s better to know this before you start. You may get in the door for a meeting, but once the adviser realises you don’t have the money the arrangement requires, you are unlikely to progress any further.

If you are willing to pay the fees, then make sure they make sense. Put simply, if an adviser charges you $3000-$4000 did it make sense to spend that amount with the amount of money you control?

This article first appeared in The Australian as Most financial advisers don’t want your business