Most advisers satisfied with success: Research

Most financial advisers are happy with the success and profitability of their businesses, rating their satisfaction 3.6 out of five, new research shows.

The 171 advice practices canvassed by Elixir Consulting and Colonial First State recorded earnings before interest and tax (EBIT) margins that ranged from -20% (loss) and up to 60%.

While this averaged to 23% for the group, the research found advice practices want to boost their revenue to 34%.

"It's essential to differentiate between what firms aim for and what they achieve, although comparing EBIT across different scales can be tricky. A 20% EBIT means something entirely different for a $400,000 turnover firm compared to one with $4 million in turnover," the Advice Operations Research Report 2024 read.

"Moreover, the journey of business growth often involves phases of intense activity followed by hiring to expand capacity, which can temporarily reduce profits until new team members contribute effectively."

Practices with up to $500,000 in turnover show a level of profitability and satisfaction higher than benchmarks for EBIT and satisfaction, the research found, noting that principals tend to be hands on in the business and wear multiple hats.

"Whilst this might be necessary for businesses in startup phase, it is also likely that principals aren't likely paying themselves a market salary and they are likely not able to afford the cost of support staff in their operations to lift themselves to the next level therefore they remain buoyant in terms of their profitability," the report read.

Practices making $501,000 to $1 million, which had an EBIT of 16.6%, saw satisfaction plummet to 3.33 out of five. This suggests challenges in scaling operations.

Typically, one or two advisers are in the business, revenue and costs grow in line, and the business "likely has capacity challenges in that there are not enough 'hands and heads' to prepare and provide advice leading to a significant time deficit".

Practices in this bucket must decide if they want to stay small and lean, or opt for a lower EBIT for a period, invest in people and systems to jump over the $1 million hurdle.

Practices with a turnover of more than $1 million had an average EBIT of 26.5% and a satisfaction score of 3.76 out of five. Practices with an EBIT of greater than 25% recorded an average revenue managed per adviser at $589,000+.

Those in the $1 million to $2 million band reported an EBIT of 24.3% and satisfaction score of 3.7.

Turnover of more than $5 million led to an EBIT of 31.4% and satisfaction of 3.91, suggesting the achievement of efficiencies through robust internal systems and keeping costs in control.

"Success is not always measured in profit alone; sometimes business owners make conscious decisions to take a short-term reduction in profit to reinvest in their business, and some business owners are only aiming for modest returns," Elixir Consulting senior consultant and the report's author Lana Clark said.

"So, when we benchmarked different techniques in firms to understand what impacts their success. We defined 'success' by both EBIT and their satisfaction with the success they're achieving - a subjective measure that enables people to reflect on their own definition of success, but an important one."