Back in May, I wrote about the pressures building in advice firms due to a shortage of highly skilled staff and the consequent costs in recruiting. With Apfa research finding profits from retail investment advice fell 16 per cent between 2014 and 2016, I thought businesses faced a worrying future.
But last month’s FCA Data Bulletin 13 presented an entirely different picture. It showed total pre-tax profits up by 23 per cent from £569m in 2016 to £698m in 2017. Revenues were up by 21 per cent. Overall, 96 per cent of advice firms made a profit on ordinary activities before tax last year.
Firms with between six and 50 advisers showed the highest average turnover per adviser at £171,284, with the highest average pre-tax profit of £358,454 per firm. So what is helping these smaller businesses to thrive?
In 1973, German economist EF Schumacher wrote his treatise Small is Beautiful – A Study of Economics. As If People Mattered.
The book talks about how modern organisations strip the satisfaction out of work, making the employee no more than a nameless cog in a huge machine. Personal talent and skill is no longer important, nor is the quality of human relationships: human beings are expected to act like assistants to the machines of the production line.
The economic system was similarly dehumanising, making decisions based on profitability rather than human need. Schumacher wanted people-centred economics which would enable environmental and human sustainability.
It was a radical challenge that ran counter to the ideas of the late 1960s and early 1970s, which demanded the triumph of gigantism.
But is this what we are seeing in the SME advice firm? A place where human relationships really matter? The camaraderie that builds up among a small group of advisers provides a great place to work. What is more, these businesses understand the need to ensure the client is at its heart.
This view was reinforced when I read about a recent Financial Ombudsman Service adjudication against a large national firm, which was ordered to compensate a couple over pension charges, where a transfer into a new plan came with a 5 per cent initial and 1 per cent ongoing adviser charge. Would an SME firm charge at this level?
The RDR helped because it forced firms to build a service around client
needs, but the constant challenge for the SME is to balance the management of risk, governance and oversight with the resources it has available.
Scale does matter and people recognise the benefits it brings. However, advisers will be less inclined to move to the larger nationals or networks unless they can demonstrate there is a genuine client-centric proposition at the heart of the business. Clients want to work with advisers that provide space for human interaction.
The large adviser firms would do well to remember this if they want to thrive.
Tim Sargisson is chief executive officer at Sandringham