From time to time, we’re asked to share our thoughts on where the industry is heading and how wealth advice firms and other industry participants might want to respond.
So, we’ve pulled out the crystal ball and identified these three key themes that we think are shaping the industry – one theme that is well under way, one that is highly likely to unfold over the next few years, and a third whose timing and impact is a little harder to judge (but it’s still worth considering).
Let’s spend some time unpacking each:
1. Scaling Up
This is a phenomenon well remarked upon, and highly expected as a profession evolves from a broadly boutique offering into a more corporatised environment. We’ve seen it in Australia in the general insurance and mortgages segments, and we’ve seen it happen in wealth advice in both the US and the UK.1
Its development is perhaps a little clouded in Australia by continued fragmentation, as both Insignia and AMP belatedly join their former banking competitors in exiting most aspects of advice, and by the continued rise of the micro-licensee.2
But overall the trend toward larger advice businesses is underscored by the activities of private equity backed aggregators like AZ NGA (www.aznga.com); M&A hungry independents like Invest Blue (www.investblue.com.au), Freedom Finance (www.ffau.com.au) and BlueRock (www.bluerock.com.au); as well as some high profile mergers3 in recent years.
So, the Australian financial planning industry has seen consolidation before – how is it different this time around? – two things: (a) much of the growth in scale is focussed at the practice level and not at “head office”, and (b) scale is being used in different ways by these larger businesses to build advantage.
The first aspect is highlighted by the AMP and Insignia advice spin-offs – unquestionably these businesses had scale in terms of clients, funds under advice and numbers of advisers. But the economic model that supported this scale did not lead to profitability for the mother ship (it was “rewardless risk” as it was described to me by one CFO!).
Instead, what we’re seeing this time around is an accumulation of assets and revenue within the one aligned economic model, where it can make the most impact. This means for the most part a much more disciplined approach to M&A, avoiding “growth for growth’s sake” transactions that add complexity but not scale.4
Which speaks to the second distinct aspect of this wave of consolidation: a focus on putting scale to work where it’s going to make the most difference. I’ve had the opportunity to spend time in the US talking to some of the larger and more successful RIAs5 in that market, and I observed the following areas where these larger players were investing – and winning:
- Larger firms have invested in people, deepening the bench strength of management and hiring and aligning quality advisers
- Many firms have used M&A to broaden their service offering and add new client segments, thereby diversifying their revenue profile and adding to adviser productivity
- To a lesser but increasing extent, larger firms are using their purchasing power to invest in meaningful technology solutions and explore new client acquisition strategies (including direct to consumer marketing).
We expect similar themes to play out in the Australian market.
2. New Competition
Among the many “coming soon” themes flagged in wealth industry forecasts, the “Golden Trifecta” of inter-generational wealth transfer, relaxed regulatory regime changes and new technology adoption have been among the more chimerical! And yet, there is evidence of green shoots in all of these areas6. What we do know is that there is significant unmet demand for financial advice in Australia which is very unlikely to be met by current advice models, and which will probably require at least two of the Golden Trifecta to materialise.
When that does happen, we can expect new advice participants – be it the industry super funds, platforms, disruptors – operating through new channels and with new advice models. And in all likelihood, operating with new economics.
While experience has shown that direct-to-consumer solutions like the robo-investors have failed to have any real impact in terms of market share in the US (let alone Australia), they did lead to compressed margins for incumbent advice businesses. If the “Trifecta” plays out in Australia, then eventually we can expect the new economics to impinge on the profitability of traditional financial planning practices.
This is where scale operators, with the ability to experiment with new segments and models, can gain an advantage (not to mention crowd out disruptors, just as high street incumbents did with US robo-advice operators). Those at the “commodity” or “procedure” end of the professional services spectrum will be most at risk.7
3. Value chain disruption
The customer-facing advice provision end of the industry value chain has been the most powerful and profitable for some time – you can see that in the way these businesses are valued.
But I confess in my 20+ years of advising I don’t recall seeing it out of kilter quite this much. Based on some recent profit pooling analysis we conducted for a client, the advice portion of the value chain constituted as much as 45% of the total industry profit pool – with significantly less risk and capital commitment required!
Great news for advice businesses, but I wonder if it’s sustainable? It will likely lead to more consolidation in those other industry segments8, but the most immediate response from these players is to find ways of eating each others’ lunch – platforms and dealer groups participating in asset management9, dealer groups looking to participate in the platform space10, platforms and dealer groups acquiring ancillary services11, etc.
But it feels like just a matter of time before these players look at that attractive advice segment and explore how they can gain some of that margin. Of course, that already happens today via examples of all these segments taking stakes in advice businesses12, but in a post-Haynesian world, there is a limit to how much this indirect vertical integration can play out.
It seems much more likely that these players will explore the opportunity presented by the confluence of the Golden Trifecta we described in theme 2 to develop their own advice offerings, participating directly in the advice margin. Indeed, we see examples of this playing out already with Vanguard’s new super offering13 and AMP’s and CFS’ recent initiatives with Bravura and Otivo respectively.
As noted, the likelihood, timing and potential impact of this theme playing out are all more opaque than themes 1 and 2 – but it’s not hard to see a world where the major service providers to advice businesses today become their major competitors in 5-10 years.
We’ve covered here the “what” of likely future industry dynamics; but what does this mean for advice business owners (the “so what”)? And how should advice businesses respond to these themes (the “now what”)? Excellent questions that we’ll consider in more detail in our next blog.
John Sullivan is one of the wealth management industry’s leading strategy commentators. His first exposure to the industry was as Senior Legal Counsel with AMP, and he has been consulting to the wealth managers, insurers, advisers, asset managers and many other industry participants, in Australia, throughout Asia, the US, New Zealand, South Africa and Europe since 1998. For the last decade, he worked with (and eventually led) Macquarie’s Virtual Adviser Network, where he worked closely with 100s of Australia’s leading advice businesses.
1 See, for example, “The Future of Financial Advice: The Australian Renaissance”, Oliver Wyman https://www.oliverwyman.com/our-expertise/insights/2021/jan/future-of-financial-advice.html
2 According to Wealth Data, the number of AFSLs with just one or two advisers has grown 54% from 2019 to 2024.
3 For example, the merger of Akambo Financial Group and First Financial in 2022.
4 Whenever you hear one of the aggregators refer to the need for “merged super firms”, it is an acknowledgement that aggregation in and of itself doesn’t lead to this type of scale.
5 Registered Investment Advisers, broadly equivalent to an IFA in the Australian market.
6 Between rising healthcare costs, increasing longevity, housing affordability issues etc, it’s likely that the sums involved in IGWT will be significantly less than the hype claims ($3.5T over 20 years is a recent data point I’ve read), but it will happen! Likewise, waiting for regulatory reform and meaningful tech solutions can feel like waiting for Godot – but it’s more likely than not that they will happen.
7 See “What Professional Services Firms Must Do to Thrive”, Harvard Business Review, March-April 2021.
8 Indeed, that is already happening in the AFS licensing space, and to a lesser extent asset management and platforms.
9 Eg, Macquarie Wrap and its ETF offerings; dealer groups with bespoke SMA offerings.
10 Eg, Findex and CPAL with technology provider FNZ.
11 Eg, Hub24 acquisitions of myprosperity and Reach Capital, Count and Diverger transaction.
12 Two of the largest players in the advice practice aggregation in Australia – AZ NGA and Ironbark – are essentially asset managers at heart.
13 https://www.afr.com/companies/financial-services/why-vanguard-is-coming-for-your-super-20241024-p5kkyz