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Changing advice models

23 January 2024 Myra Knoesen

During a summit, Evan Baars, Partner at NMG Consulting shared an update on South African advice models in the context of global trends including changing advice models, succession planning, acquisitions and migrations and more.

The headwinds

Starting with headwinds, Baars said that affordability challenges are at an all-time high (consistent across international markets too, for example, the UK and Australia). “We’re seeing this translating into lower net flows (mainly due to increasing outflows). This also has implications on life risk sales (much lower).” 

“On the life risk point, here we’ve seen challenges around ‘ease of business’ - advisers state that service levels haven't returned to pre-COVID standards, and that underwriting has become more complex and stringent as well. We’ve seen a lot of advisers shift away from risk towards investments, partly due to aforementioned challenges as well as an increased focus on building a more diversified revenue stream and cashflow profile” he continued. 

Another key trend, according to Baars, is the political climate and the economy. “These are driving significant offshore placements (in hard currency). This, however, does mean that advisers are having to upskill in the offshore space.” 

“The upside of this, is that customers are highly aware of the value of advice. When times are easy, we see a higher proportion of customers believe they can do it themselves (or in theory with a robo-adviser), but we believe these market conditions are perfect for advisers to demonstrate their value. Our market share stats support this - we've seen the non-advised customer segment move into net outflow this year,” he added. 

Succession planning

Looking at the other trends, Baars said that succession plans have driven some advisers to bring in younger advisers (e.g., graduates). 

“At its simplest, succession planning appears to have two core elements which is, firstly, that an adviser is being paid for their book, to fund their retirement. And secondly, an adviser wants to secure continuity for their clients.” 

The challenge with bringing in younger advisers, according to Baars, is that they rarely stick around. “We speak to the adviser two years later, and their young graduate is gone. Advisers are struggling to get these young advisers to stick around and see the long-term vision” he said. 

So, what is the solution to succession planning?I think it's still to be decided, and don't think there's a one-size-fits-all. We're certainly seeing many advisers join larger firms / networks, but not all advisers are interested in this model. For the others, as an example, we could start to see Discretionary Fund Managers providing matchmaking amongst their adviser base (as they have the most to lose from migrations to networks),” he said. 

Acquisitions and migrations

“We’re seeing a huge amount of acquisition activity. This is due to two primary reasons: (1) succession plans (with the reason mentioned above) and (2) regulatory burdens - advisers are finding it harder and harder to keep up with the regulatory requirements, and there’s more coming,” he said. 

“Yes, some advisers want to be acquired, but they’re vastly outnumbered by firms that want to buy them. As a result, we’re seeing acquisition multiples driven higher and higher,” emphasised Baars. 

“Multiples, he said, used to be in the range of 1-2x gross revenue for an adviser’s investment book, now standard is moving closer to 2-3x, and we know of examples where 5x was paid, and we know of advisers who are asking for up to 8x. We do question whether this drive for higher multiples is good for the industry though, as it can incentivise the use of high-margin investment products,” he continued. 

Intergenerational wealth transfers

When it comes to intergenerational wealth transfers, Baars said they are seeing advisers expand their advice to the broader family - bringing in the partner and children – “and yes, there are challenges sometimes if the children are overseas, but there are generally enough clients where this isn’t the case.” 

“This is an area where having another adviser in the practice (e.g. the succession plan) can assist in dealing with the younger client base. It is important to note that this is largely how it’s played out thus far in the UK - not in the wealth transfer so much yet, but rather as a lead generation mechanism to build a base of new young clients (that can otherwise be harder to reach),” he added. 

In conclusion, “Our view would be that while market conditions are tough, they highlight the value of advice and present a real opportunity for advisers to further evolve and differentiate their value propositions. We believe that the businesses that position correctly in the coming years will continue to grow rapidly regardless of (or even aided by) these headwinds,” he said.

Writer’s thoughts

As the sector grapples with affordability issues, shifting dynamics and increasing complexities post-COVID, advisers are demonstrating resilience and adaptability. Time and time again, we have seen the industry’s ability to overcome challenges and embrace change for continued growth. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za

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