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Tim Sargisson: Why the tables are turning for small advice firms

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?

Tim Sargisson: The answer to increased costs and reduced resources

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?

Taking the plunge into direct authorisation

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

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. I have worked in both small and large companies, the culture is completely different as the article states. In a smaller company the needs of the client and the individual client are important, whilst still retaining the need to be commercial and profitable.

    I have yet to see many examples where consolidation has proved beneficial to clients and advisers, usually the business owners filling their boots.We are told that there are economies of scale, the benefits of which never seem to find their way to advisers and clients.

    In larger firms I always felt that I was an expendable part of a large machine, requiring advisers to work flat out to meet stringent targets to fund the lifestyles of the layers of management above them. Now I have control of my workload, my clients know that I have their interests at heart, and an acceptable work/life balance has been achieved, which I believe has helped me to provide a better service as my clients are my only focus.

    • I agree, Mr Sharpe! After 29 years as an IFA, in large and larger firms, I was pleased to step into a 2-man band in 1996 and don’t regret going it alone from 2015 when the senior retired. If I sell or merge, my worry is that my lovely clients would get turned over. An exit strategy is forming for a dozen or so years or so.

  2. Told you so – numerous times. Small is beautiful,always was and always will be. No substitute for working in your own business.

    So much for APFA’s stats!

  3. Dominic Thomas 19th July 2018 at 3:49 pm

    A small firm lives and dies by its service to clients, reputation is everything. These days due to improved technology, we can effectively work with lots of people and organisations without having them as full-time employees, essentially outsourcing various aspects of the workload. Frankly it then comes down to walking the talk and running a business that puts clients at the heart of everything.

    Another key aspect is the willingness of many advisers, paraplanners etc to share good ideas and best practice. There is a genuine spirit of friendship, appreciation and helpfulness that exists. It seems that most have realised that being better serves their own clients and the wider population and all of our best interests. The days of trying to conquer Britain with market share have long gone… unless you are a big firm, where I would suggest focus is a little different.

    But each to his/her own. There is no one “right way” to run a financial planning business, many great ideas, lots of different models and a good, rising number of excellent next gens around.

  4. I agree with Geoff Sharpe and this article, as an firm with over 40 years as a record and our source of new clients is from the recommendation of existing satisfied clients

  5. David Cathcart 20th July 2018 at 9:59 am

    The very best, most qualified and experienced advisers I know have their own one or two person practice. Admittedly all initially worked for the nationals, but soon realised that having your own loyal client base is the secret to a long and profitable business

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