Profitability is shrinking across the advice industry, new report shows

New research by BusinessHealth and Midwinter has reported shrinking profitability across the advice industry, alongside a drop in the number of clients per adviser.

The Future Ready IX 2020-21 report found that the average business profitability dropped from 28.2 per cent in 2020 to 24.0 per cent.

While the profit squeeze has been felt by businesses of all sizes, the research revealed that small businesses with revenue of less than $500,000 continued to be hit the hardest.

Even after increasing the average revenue per client and surrounding themselves with more support, the average notional profitability of these small businesses dropped to an all-time low of just 6.8 per cent.  

This, the research explained, equates to an average profit per owner figure of just over $36,000.

Commenting on the findings, the firms noted that if this decline in profitability continues, “the ongoing viability of many more advice businesses will be severely threatened.”

Exploring the average number of clients per business, the report found that the number has stabilised at 564, after dropping from 715 in 2017 to 530 in 2019.

However, the average number of clients per adviser did continue to fall – this key performance indicator fell from 241 two years ago to 228 in the latest analysis.

Also, while advisers are servicing fewer clients in total, the number of ‘A’ class clients they advise actually increased from 79 to 105.

These findings, the researchers noted, could indicate that Australian advice businesses are becoming much clearer on who they can best serve, and they are continuing to build their businesses around these target clients.

Looking forward, of the 200 surveyed principals from advice businesses, 69 per cent said they plan to increase the number of clients they service over the next 12 months, while 64 per cent predicted a boost in profitability.