There is a constant drumbeat of speculation about what will happen in financial advice businesses. Just last week I was contacted by three journalists to comment on news about the implications for the future of advice off the back of Schroders Personal Wealth hiring Mark Duckworth and the news that Fidelity now employs five advisers. The supposition behind all the interest is that “things can’t stay as they are…”To that, I reply: “Sure they can.”
At NextWealth we look at the wealth management industry through the lens of financial advice businesses. We want to understand how changes to financial advice will impact upstream on asset managers, platforms and technology businesses. We spend most of our time considering how the adviser market will evolve and how firms ought to adapt. Today we set out some of our thinking.
The expectation has long been that a natural evolution will occur to larger financial advice businesses with scale to support the needed technology and operations infrastructure. The headwinds for small firms are well documented: FSCS fees and levies, PII, regulatory and compliance costs and technology costs. Some signs point to advantages of scale, but we’re not convinced. In many ways it’s never been easier to set up a financial advice business (putting aside the challenge of finding clients in the short run).
The latest data from the FCA show that 89% of financial advisers work in businesses with five or fewer advisers. NextWealth research shows that while most small firms are directly authorised, they are more likely than average to be appointed reps of networks. Networks typically provide technology infrastructure, compliance oversight and accounting support. They can offer small businesses the support needed to run efficiently. Among those that are directly authorised, many fall under the umbrella of branded nationals (such as Openwork or SJP) and consolidators.
But consolidation is driven by more than just the effort needed to run a small advice practice. One of the main drivers to consolidation is the prices paid for advice firms. Private equity backed consolidators are growing in number, driving up the prices paid for advice businesses.
Financial advice businesses make an appealing acquisition. They offer recurring revenue, a sticky client base and a perception of gross inefficiency. I say perception because there is little evidence to suggest that adviser productivity increases markedly post acquisition.
Big firms should have the infrastructure in place to allow advisers to spend more time with clients, but the numbers tell a different story. In research we published recently for Fidelity FundsNetwork we found that financial advisers only spend about one quarter of their time with clients.
I recently spoke with an executive at a PE-backed consolidator, who told me that while his firm provides all of the infrastructure an adviser would need, they see very little gains in productivity post acquisition. The firm employs just under 50 paraplanners, has an integrated back office system and platform, and has a well-managed investment proposition. Included in the sales pitch to join the firm is an estimate that the adviser can increase his or her time with clients by about one third by joining the group. In truth, the firm has rarely seen an increase in productivity post-acquisition.
What does this tell us about the future of financial advice businesses? Our view is that the pace of consolidation will accelerate but that a healthy number of SMEs will remain. This is why I gave the flippant answer in the introduction to this newsletter that things can stay as they are. Sure, we’ll have more big firms offering financial advice, but we’ll also have large number of small and medium sized advice businesses.
Financial advisers part of bigger businesses will tend to service the mass affluent and high net worth individuals. Alongside this, a thriving group of SMEs will remain, mainly offering bespoke advice to high net worth and ultra-high net worth individuals.
The difference is that decision-making will become increasingly centralised with a few gatekeepers. We think a larger proportion of smaller firms will join bigger firms, either as appointed reps of networks or under the umbrella of branded nationals and consolidators. We also expect more product providers to become vertically integrated, either by acquiring financial advice businesses or by recruiting advisers. All of this will centralise choice of product and technology further.
NextWealth delivers half-day workshops to platforms, product and fintech providers on how to refine distribution strategy to match the future shape of retail advice flows. Email us for details.
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