We are often asked how we see the financial advisory market taking shape in the coming years. We expect to see continued consolidation and automation bringing efficiencies to improve adviser productivity. Demand will continue and we believe a human element will remain a core part of advice.
Consolidation
We said in January, at our Platforum Perspectives event, that we expect to see consolidation of the advisory market with the rise of large firms and the decline of smaller firms. The reasons for this are regulatory burden, demographics and the greater margins that can be achieved from vertical integration.
Increasing compliance costs and the burden of regulatory fees and levies is a key driver of consolidation of advisory firms. A financial adviser we spoke to earlier in the year lamented that regulatory costs had increased 95% in the past year.
Carl Lamb, when he sold Almary Green to Standard Life’s 1825, famously said: “I have long been concerned about the sustainability of firms as a result of spiralling costs – due mostly to the increasing cost of regulation.”
Another key factor is demographics. Many advisers are looking to sell the business with an eye to retirement.
But perhaps the main moving force is the higher profitability of vertically integrated firms. This gives them the financial clout to be able to raise money from venture capital investors or even go public and make the acquisitions. Purely advisory firms can make a pretty good living – especially if they are small and nimble. But none can match the scale and profitability of a Towry or a St James Place. And there are a number of others following with various degrees of success.
But what happens to advisers from acquired advisory firms? Do the consolidators manage to retain the key rainmakers post acquisition? The anecdotal evidence seems to suggest that when a consolidator buys a firm, some advisers stay and some leave. We have heard rumours that Carl Lamb has plans to retire to Australia in a few years.
While Bondi beach lures some, what about those left behind? Inertia is also a very powerful emotion, so many take the line of least resistance and remain with the old firm in its new guise. The skill of consolidators is to make the transition as painless as possible and in many cases to provide an attractive business buy-out proposition. Some people like the prospect of such an outcome and also enjoy the comfort of being part of a larger organisation, with typically a bigger infrastructure, more support and a stronger financial base.
Of course the bigger the post acquisition transformation, the greater the impetus to leave.
Advisers who take the plunge and get out are most likely to join other firms that share a similar approach and method of operation or join a larger network as an appointed representative. Setting up a completely new firm can take months, but some appointed representatives eventually transition and become directly authorised.
Automation
Automation is more likely to help advisers improve their productivity long before it seeps out into the D2C world and makes a serious impact with do-it-yourself consumers. In fact automation is already making advisers more efficient and has been doing so for some time.
Advisers tell us that they are gaining efficiencies in risk profiling and client reporting in particular. Other automated success stories include fact-finding, lifetime cash flow modelling, protection needs analysis, and database searching to identify clients with specific needs. And of course plenty of advisers are whizzes with spreadsheets for all kinds of things.
Perceptions of value
The battle is to make the value of the advice greater than its cost. So far advisers say they aren’t seeing much client push back on fees, even among those charging 1% on an on-going basis. But many advisers don’t feel they can charge that much and there are plenty of clients who resist going to advisers in the first place – citing fees as the main deterrent. And many firms are finding it tough going.
Advisers who don’t sell out will look to automation to make further improvements to their productivity. And many will discover that they will have to add some sort of vertical integration if they want to build the kind of capital value that Towry achieved.