The stakes rise as revenues fall

In the good times, revenue from platforms have been a strong source of income for dealer groups and advisers.

The platform operators have also been generous with their sponsorship of adviser conferences and other events.

But discretionary marketing spending has disappeared from platform operators’ budgets and revenue to advisers has been hit by falling funds under administration.

This loss of revenue for practices has particularly impacted those businesses looking to sell.

Kenyon Prendeville director Alan Kenyon said he had seen dealer group revenues falling during the past year and that was impacting on individual practices.

“If the practice’s principal was on a profit share of the platform rebate, 12 months ago they might have got $60,000,” Kenyon said.

“Today they might get $40,000, and that continues to fall.”

He said the fall in revenue for well-run businesses had been between 10 to 12 per cent.

However, poorly-run financial planning businesses were down more than 30 per cent.

“One of the critical factors in small planning practices is fixed costs such as office rent and staff,” Kenyon said.

“So it is the principal who is taking the hit when revenue from areas such as platforms falls.”

He said if the practice is highly geared, the fall in revenue could be critical.

John McCormack, who runs a business consulting service to advisers, said he had seen recurring revenue for planners falling in the last 12 months.

“The recurring revenue from charging a fee on investments has fallen; some of this is from platforms,” he said.

“I suspect we will see a rapid move towards fee-for-service as a result of this.”

McCormack sees advisers moving to other products, such as risk insurance and agribusiness managed investment schemes, to replace the lost revenue from managed investments.

This again could take revenue away from the platform operators as few cater for agribusiness schemes, although most now offer risk insurance through the platform.

Haywood Financial Management principal Scott Haywood said falling revenues were just part of the rethinking of how an adviser delivers their service levels.

“We have had to look at how we manage clients’ value propositions,” he said.

“All our clients have been reviewed in the last 12 months and we have revised the service levels of some.”

Haywood said some clients were paying their fees monthly by credit card while other have ongoing fees based on funds under advice.

“We have been taking fewer fees because clients’ funds under advice have fallen,” he said.

They have had to explain to some clients that their level of service is now dropping because of the falling value of their portfolio, Haywood said.

Falling revenue has meant Haywood’s business has had to look for more operating efficiencies.

“This is something we have to manage as we respond to the drop in fees,” he said.

“Luckily, 30 per cent of our business comes from risk insurance, but we still have to anticipate our revenue and make adjustments accordingly.”

Haywood said advisers now have to apply lessons they have passed onto their clients to their own businesses.

“Advisers need to make sure they know what their earnings from clients will be and then budget for this income,” he said.

However, for some dealer groups the fall in platform rebates is not an issue.

Centric Wealth chief executive officer Michael Pillemer said the dealer group’s fee-for-service approach meant it was not dependent on platform rebates.

"Our business model is for quality advice, for which we charge a fee,” he said.

“As a result, our revenues have been resilient throughout this period.”

Pillemer said more than 50 per cent of Centric’s revenues were not market related, coming from its accounting operations and advice areas such as risk insurance.

The group’s administration services are outsourced to Avanteos and it also uses other platforms, but the income from rebates is minimal.

“We generate our revenue from advice fees,” he said.

But the loss of revenue for many planning practices will be crucial and it will cause them to rethink the platform strategy they are using.

“I think smaller planning practices, especially if they are linked to an accounting firm, will take their platform operations in house,” McCormack said.

“They will be able to use planning software tools ... and use the accountants for administration if the practice is small enough.”

However, those dealer groups staying with platforms will be looking to drive down their costs by renegotiating platform fees.

McCormack said he had heard of planning practices switching platforms based on cost and he expects this to continue in the next 12 months.

— John Wilkinson