Small firms have never been busier, more profitable and optimistic about the future
In 1897, the New York Journal reported that American writer Mark Twain was dead. In fact, it was his cousin who had perished. This prompted Twain to politely inform the paper “the reports of my death are greatly exaggerated”.
You would be forgiven for thinking mistaken obituaries are confined to the 19th century. But there has been no shortage of headlines over the past few years on how small advice firms will die a painful, horrible death.
Pundits have cited everything from RDR and Mifid II to the rise of consolidators, vertically integrated models and robo-advice as some of the reasons they would not survive.
In fact, such factors have conspired in favour of small firms, not against them.
RDR amplified the value of independent advice, not diminished it. Unshackled from the limitations placed on their income by trail commission, advisers could demand a higher fee for their services.
The cost of advice has virtually doubled since RDR. That implies consumers recognise the value of good advice. In return for higher fees, advisers are more focused on the service they offer. I have no doubt the total cost of investing will decline in the coming years, but I wager that platforms and fund costs will bear much of the brunt.
Technology has also made life easier for advisers. Building a brand and acquiring clients is much simpler, and gone are the days of spending hours on the phone just to get a pension valuation.
There is no evidence that robos pose a real threat to human planners. Robos will invariably become tools for advice firms, helping them be even more efficient with onboarding, reporting and portfolio management.
And that is not all. Advisers can outsource almost everything these days. From paraplanning, compliance and admin to investment management and marketing.
All of this points to one thing: small firms have never been busier, more profitable and optimistic about the future. If anything, it is the large firms that seem to be struggling. You can count the number of these firms that make a profit on one hand. Even fewer make money from giving advice as opposed to the expensive in-house funds they peddle. It is no surprise product providers are buying up loss-making advice networks.
According to a recent FCA Data Bulletin, a solo adviser earns about £11,000 a year less than an adviser in a large firm. But an adviser within a small firm (two to five advisers) earns about £4,000 a year more. So, for all the institutional level support, marketing and branding, advisers in a large firm are no more “productive” than those in small firms. So much for efficiency of scale.
I am also not convinced that the operating costs per adviser in a large firm is less, given the layers of management oversight and compliance such businesses require.
Of course, all types of advice firm have been helped by the raging bull market of the past few years. Things are bound to be a little harder when the bear market hits.
But I bet small firms are better placed to adapt and trim their fat than big players burdened by large costs. Small is still very beautiful.
Abraham Okusanya is director of Finalytiq