Using information from its Retail Mediation Activities Return (RMAR), the increasingly data-driven regulator paints a very optimistic picture for the advice sector. To take only a few of the headline figures, total reported earnings increased to £4.5bn in 2017 and aggregate pre-tax profits rose to £698m, up 22% and 23% respectively.
Advisers have 2.8 million ongoing clients and provided 1.2 million initial/one-off advice services in 2017.
The figures also clearly demonstrate the continued shift in model and, arguably, the success of the retail distribution review (RDR). The total revenue from adviser charges increased by 27%, or £975m, in 2017 to £4.65bn.
The bulletin also says that much of the increase was due to ongoing charges which grew by 28%, rising from £2.2bn in 2016 to £2.82bn in 2017.
Perhaps the final eye-catching figure, given the many predictions over the years about the demise of smaller businesses, is that the profit margin for the smaller firms is 43%. So, does this mean advisers have reached the sunny uplands?
Trending up
The industry analyst who arguably had most influence in shaping the current retail advice market is Ned Cazalet. He wrote a series of often-stinging reports starting around the turn of the millennium outlining the unsustainability of the commission system for life offices and therefore for independent financial advisers (IFAs).
Cazalet also suggested advisers could sort out their business models by focusing on those clients with assets, especially those nearing retirement.
In many ways, this has now come to pass.
Cazalet says: “Core quality adviser numbers have not gone down, they have gone up. Paraplanning is on the increase and the advisers have become more professional. Platforms have been the vehicle to change the style from commission to ongoing fees. RDR gave that a huge impetus but on top of all of that came pension reforms with many more people in drawdown or at least in not-annuities. They need a lot of advice even if for some that is a gentle hand on the tiller every couple of years with some automation.”
Cazalet notes that adviser numbers have been trending up while revenue and profitability per adviser has increased, and there is much less consumer detriment.
He adds: “Think of the contrast going back to the 1990s when you had what I would call ‘grade-A criminality’. With all these salesforces, it was basically New York in the era of Kojak. You dared not go out on to the streets. People forget how shocking it was.”
Invest in tech
However, if the industry has put such times behind it and individual adviser firms are making money, what should they be doing with it?
Finance and Technology Research Centre director Ian McKenna, perhaps unsurprisingly, says advisers must invest in tech for both client communications and in terms of streamlining processes.
He says that financial services will see much more competition from the likes of Apple and Amazon. But it is the latter which has clear designs on financial services even to the extent of recruiting insurance personnel in the UK, which recently hit insurers’ share prices.
McKenna adds: “It is really important for firms to be reinvesting the profits they are making now to build digital relationships with their customers so they are ahead of the Amazons of this world now. If you wait till Amazon comes along you will never catch up. Digital isn’t the only way you communicate but it must be part of how you communicate. If firms are making good profits now, they need to invest in online communications and streamlined systems, so they are ahead of the game because there is a new level of competition coming.”
Choking points
IFAs accept the need to keep investing in tech, but they also remain wary of breaking out the champagne just yet.
Syndaxi Financial Planning director Robert Reid says: “There is far more business than there has ever been, but you are never really sure because of regulatory hindsight whether it is being written safely or not.
“Advisers also need to be aware that there is going to be more downward pressure on investment charges, and I don’t think there is the level of confidence in some firms about what is seen is acceptable in terms of revenue and what is seen as valuable from the clients’ point of view.”
Reid also points out that even information gathering from providers remains an arduous task, so much so that he has occasionally gets clients to phone themselves to underline how difficult this can be. So, while he believes it is important to invest in technology, the reality is that there will always be choking points.
He also suggests that you need to be careful not to assume that the answer is always increasing staff numbers.
“Some people say, ‘Well, if there is extra volume all you need to do is hire more people.’ That is fine if you know that volume is going to be maintained, but you can end up with massive overheads. I would always invest in technology but you have to accept that some parts of the process cannot be automated.”
He adds that often when it appears advisers are increasing efficiencies they are faced with another cost – such as Mifid II and GDPR.
Consolidation
That said, those researching the IFA market believe that this may only be the beginning of the better news.
Cazalet is also more upbeat about the current spate of consolidation compared with some of the immediate post-RDR consolidation because the assets have not been gathered in the ‘old school’ way.
“It is not just that the numbers are being positive,” he adds. “What we are also seeing is advisers building up sustainable businesses. You need a different model altogether by building equity and building your skill sets. Actually, we think it is very early days in terms of consolidation.”
