Middle cut from financial planning market

The middle is dropping out of the financial planning industry as medium sized financial services groups continue to decline in numbers through mergers and consolidation, according to research commissioned by theFinancial Planning Association (FPA).

Rampant industry consolidation has seen mid-size financial services groups decline from 19 per cent to three per cent of the financial planning market between 1996 and 2002 when measured by the number of individual businesses, the research says.

Undertaken byRMIT University, the research also shows there has been rapid growth in the number of boutique financial planning practices, suggesting a polarisation of the financial planning industry into large consolidated groups and small groups, with fewer businesses left in the medium size bracket.

According to the research, released at last week’s FPA conference, the number of boutiques increased from 52 per cent of the industry in 1996 to 87 per cent in 2002.

However, despite the increased number of boutique financial planning businesses, the sector employs only 18 per cent of authorised representatives, with financial services groups including banks and life companies employing 55 per cent, the research says.

“We are seeing the middle start to disappear slightly,” RMIT adjunct professor of financial planning Wes McMaster says.

McMaster believes the increasingly polarised financial planning sector will result in changes to the way providers of financial planning will conduct their business.

He also suggests that small firms are tending to grow by acquisition, viewing organic growth as a harder road.

The FPA research classes a boutique financial planning practice as having less than 20 representatives.

The research showed that boutique financial planning businesses intend to halve their commission income and more than double their fee income over the next 12 months, as they move towards a fee-for-service model of planning.

It also discovered details about the make up of the industry, with 86 per cent of the 16,000 authorised representatives employed in giving financial planning advice, the other portion being made up of paraplanners, researchers, compliance experts and management.

These findings revealed an adviser to paraplanner ratio of 19 to one, which McMaster says indicates that many financial planners continue to do their own paraplanning.