Advisers experiencing ‘champagne problem’ with pricing power
The financial advice industry is experiencing a “champagne problem” regarding pricing, with advice firms seeing no need to cut their prices to remain competitive.
In a Morningstar webinar, Daniel Needham, president of Morningstar Wealth, discussed the attractiveness of the financial advice industry in Australia. Even though it is experiencing high levels of regulation, he said it remains an attractive market compared to other parts of the world, which is attractive to overseas players.
Recently, Bain Capital, CC Capital and Brookfield have expressed interest in Insignia Financial, while Oaktree Capital and Barings have invested in AZ NGA.
One key reason, Needham said, was the pricing power demonstrated by firms, with the median advice fee sitting at $3,960 in 2023.
Needham said: “The biggest indicator of attractiveness of an industry is the pricing. If there is a lot of competition and rivalry, then we see prices come down, and you see businesses go bankrupt or consolidate. For advisers in Australia, you have your ideal customer, you’re operating from referrals, and you are rarely forced to lower your prices.
“I view this as a champagne problem and another net positive for advice. What would seem an easy way to compete is not coming through in terms of prices coming down.
“Outside of the ultra-high-net-worth advisers, there is very little competition and very little price competition. We see stable prices, high retention rates, which makes it a really attractive industry and that’s why we’re seeing private equity money come into the market because it is such a high-returning opportunity.”
While he said the level of consolidation may create some pricing pressure, he added the firms entering the market are attracted by its pricing power in the first place and therefore unlikely to discount fees.
Overall, he concluded financial advice is an area of the market that he will invest in, thanks to pricing, client numbers, adviser numbers and rising household wealth.
“Adviser numbers are constrained. You’ve got less competition, your clients’ wealth is growing, compliance costs are keeping competitors out, digitisation and technology are going to allow you to run an efficient practice without adding more people.
“There’s clear pricing power, and there isn’t pressure to cut fees to win clients, and that’s a really good indicator of an industry that is doing well.
“As an industry analyst, I would look at this and say, ‘Wow, this would definitely be a positive score,’ if I was looking to invest in the industry.”
AUTHOR
Laura Dew
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