There is no doubt that the world of financial advice is evolving apace, presenting both challenges and opportunities. At our recent IP Advisor Forum, the discussion between David Stronach, Head of the Ninety One Investment Platform, Jaco van Tonder, Director Advisor Services, and Simone Arnold, Head of Sales, highlighted some of the trends with which advisors are grappling – from the shifts in flows to consolidation, profitability pressures, and the operational complexities of balancing legacy systems with innovation. We’ve summarised the highlights of their discussion below.
The allure of offshore
With declining savings and rising withdrawals, local investment flows (as measured by NMG1) have painted a dismal picture over the last two years, reflecting the broader economic challenges facing South Africa. Offshore, flows, however, have meaningfully overtaken domestic investments as the externalisation of assets gained pace. This is reflected in Ninety One’s offshore flow experience too, which have doubled new flows over the last year. Of this total offshore flow, 84% was directed to sinking funds in recognition of the tax-and estate-planning benefits for clients.
Guaranteed versus living annuities
Over the last year, guaranteed annuities have attracted an astonishing 80% of the flows into retirement income products. Despite the surge in their popularity, Ninety One has opted not to offer a guaranteed annuity product. The rationale is based on the cyclical nature of interest rates and inflation, which can make guaranteed annuities appear more attractive in the short term but less so over a full market cycle. Ultimately, a balanced approach, combining guaranteed annuities with living annuities can provide clients with flexibility and the potential for better long-term outcomes. This strategy allows for adjustments based on market conditions and individual client needs, ensuring that clients are not locked into a single product that may not perform well across different economic cycles.
Untapped opportunities
Despite the challenging economic backdrop, there are still meaningful untapped investment opportunities. These include legacy retirement annuities (RAs), which have historically been burdened by steep penalties for early withdrawals. However, regulatory changes have reduced these penalties, with caps currently set at 10% and further reductions to 5% expected by 2028. Advisors are encouraged to revisit older client portfolios, many of which include legacy RAs. These assets, often untouched for years due to perceived high costs, now present significant consolidation opportunities, potentially delivering better value for clients while boosting advisory business assets.
Additionally, there is an unprecedented accumulation of retail bank deposits in South Africa. Retail banking data shows cash holdings by small investors and businesses have reached an all-time high of R1.8 trillion, significantly above the historical average of R1 trillion. This R800 billion in excess liquidity is a prime target for financial advisors to channel into long-term investments, especially as interest rates decline, creating an environment conducive to equity and other growth-oriented investments.
The succession-planning imperative
Succession planning has emerged as a dominant topic in the industry, driven primarily by a surge in buyer interest. Data reveals a stark imbalance: for every advisor looking to sell their business, there are 10 to 15 buyers eager to acquire practices. This demand is fuelled by larger networks and independent firms seeking to expand through acquisition, with consolidation viewed as inevitable.
While the buyer-driven nature of the conversation dominates public discourse, sellers — especially those nearing retirement — are well-positioned to command strong valuations for their businesses. Approximately 8% of advisors, many over 60, are actively considering selling. For them, the current market appears to present an opportune moment, because they’re likely to get a good price. However, this narrative often overlooks the seller’s perspective, which is not just about maximising value but also about preserving the firm’s legacy and ensuring continuity for their clients.
The rise of networks
A significant trend in the industry is the consolidation of smaller independent advisory firms into larger networks. Over the past decade, the proportion of advisory firms with fewer than five advisors has declined from the mid-50% to the mid-40% range. This reduction reflects a broader movement toward larger organisations, with firms employing over 100 advisors gaining prominence. Large national networks are leading this shift, presenting smaller firms with opportunities to leverage economies of scale and centralised resources.
While consolidation offers strategic advantages, it also reflects the growing operational and regulatory burdens that small firms struggle to manage independently. These changes signal a maturing industry where the ability to navigate complexities defines success.
Revenue growth and advisory fees
Despite the disruptions caused by the Covid-19 pandemic, average advisory fees for a cohort of 50 top advice firms that we track annually have remained steady at 65 basis points (bps) of assets for three consecutive years now. However, revenue growth has rebounded strongly, driven by the post-Covid rebound and the return of more consistent client inflows, marking a recovery to double-digit rates.
Figure 1: Advisor fees as % of AUM
Figure 2: Revenue growth p.a.
Source: Ninety One Financial Review 2023.
However, scepticism persists around the future trajectory for advisory fees, especially when compared to global markets like the UK. While South African advisors maintain steady fee structures, their ability to drive long-term revenue growth depends on providing value through innovative services and improved client outcomes.
Profitability pressures and operational challenges
Operational profit margins for South African advisory firms have slipped to 35% for the first time since we began surveying the cohort of firms, falling below the US and UK long-term average of 40%. Rising compliance costs, increasing administrative demands, and investments in technology are key contributors to this decline. These challenges emphasise the need for firms to manage their income lines very carefully, whilst at the same time looking to streamline operations and adopt technology-driven efficiencies to counteract margin pressures.
Figure 3: Average operational profit margin
Source: Ninety One Financial Review 2023.
Platforms, which serve as the backbone of many advisory services, face even greater profitability challenges. Despite significant reductions in fees — falling from 100 bps 20 years ago to approximately 30 bps today — platforms have expanded their product and service offerings considerably. Yet, this evolution has not translated into financial sustainability for many, with several South African platforms operating near break-even or at a loss.
Balancing innovation with legacy systems
The discussion underscored the complex dynamics platforms face in addressing legacy systems while pursuing innovation. Platforms have reached a “T-junction”: they must choose between becoming commoditised, low-cost operations or retaining full-service propositions that accommodate legacy assets. Both paths present opportunities and risks.
Succumbing to “shiny new thing syndrome” — prioritising new technologies at the expense of existing infrastructure — can alienate clients and increase operational inefficiencies. Conversely, clinging to outdated systems without advancing creates stagnation. Striking a balance between integrating bold innovations and maintaining legacy support is critical for long-term success.
While industries like space exploration thrive on non incrementalism — making massive leaps forward — financial platforms require a more measured approach. Innovations must be carefully integrated to avoid inefficiencies, such as running dual systems that double costs.
Looking ahead
The South African financial advisory industry is poised for transformation, with a wealth of opportunities to sustain long-term growth. By revisiting untapped client assets, leveraging regulatory changes, sensibly deploying technology, and addressing succession planning strategically, advisors can navigate current challenges while positioning themselves for future success. Partnering with a well-run, strategically aligned platform remains a crucial part of this.
1 NMG SA Retail Savings & Investments Study – June 2024
