The advice market has faced a significant number of challenges in the past year which continue to complicate the prospects for the profession.
The combination of regulatory challenges posed by the introduction of Mifid II, Priips and GDPR with the uncertainty surrounding Brexit has led to many advisers feeling less sure about their future, while many remain concerned about the rate young financial planners are being hired to replace those exiting the profession. However, there are plenty of reasons to be optimistic about the latest data on the advice market.
In its recent Financial Adviser Market In Numbers report, trade body Pimfa outlines the current and expected trends in the market and breaks down how size and structure will impact the industry in 2019.
While the the total number of financial advice firms registered with the FCA at 31 December 2017 was 13,690 – a sizeable decrease from the 14,254 at the end of 2016 – the number of actual advisers increased by 700, from 25,611 to 26,311.
The numbers reflect a continuing trend seen this year of smaller firms partnering with peers or selling to advice consolidators in the hope of gaining access to better technology and compliance offerings to boost their competitiveness – but also recruitment drives across the market to bring fresh blood in.
As consolidation continues, the average number of staff per firm is slowly creeping upwards. In 2017, there was an average of 4.77 staff per advice firm, Pimfa finds, slightly up from 4.62 in 2016 and 4.4 in 2013.
Picking up the profits
Pimfa estimates that there is now around £274bn worth of assets under management being administered for private clients across the advice sector. Just under 40 per cent of the firms in the market are directly authorised, with the split between DA and appointed representative models continuing a stable decade-long trend.
The proportion of revenue coming from commission as opposed to fees is also falling. Net commission revenue stood at £772m in 2017, compared to £2.9bn in fees. In 2009, commission accounted for £1.4bn in revenue, compared with just £140m generated by fees.
In 2017, 80 per cent of the advice market’s income came from providing independent advice, compared to 16 per cent for restricted. Focused advice accounted for three per cent, and execution-only or non-advised services offered by regulated advisers just one per cent.
Data from the regulator’s Financial Advice Market Review in 2016 looked at the advice on offer within the sector and noted 15 per cent of firms were restricted.
A Freedom of Information Act request carried out by Money Marketing columnist Paul Lewis earlier this year had that figure reduced to 13 per cent as at February 2018. Overall, retail investment-based revenue was up from £3.1bn to £3.8bn.
The report says: “There was a slight increase in investment business over 2016; a decrease in mortgage business commensurate with a slowdown in the housing market with tighter lending earlier in the data and a blip of tougher conditions for mortgages in 2016, [but] this is now returning to its steady rise again for 2017.”
In particular, pension freedoms opportunities appear to be driving a healthy advice market.
Pension products accounted for 80 per cent of sales made by advisers last year, the Pimfa data shows.
The data lists annuities and drawdown sales separately, accounting for a further 8 per cent of sales, ahead of 3 per cent for bond sales.
Nine per cent of adviser sales were split between Isas, investment trusts and protection products.
FCA figures last month also point to an upward trend in advised decumulation sales in particular, which have reached their highest level since 2012.
There were 43,386 advised decumulation product sales in the second quarter this year, up 7,019 from 36,367 in Q1.
Advised sales generally are slightly higher for the 2016/17 financial year than the three before, but down significantly from figures between 2006 and 2012.
Non-advised products accounted for around 60 per cent of sales.
Bringing in fresh blood
Efforts have stepped up across the industry again this year to show financial planning is a lucrative career option, both for graduates and more experienced professionals.
A Money Marketing/BWD survey in May placed the average total earnings for employed advisers at £93,100 in 2017. It is hoped that Pimfa’s new figures on how profitable the sector is will also help in this effort. The data shows that retained profits are up in absolute terms – from £102m to £230m – and as a proportion of revenue – from 2.8 per cent to 5.1 per cent.
The average annual revenue earned by regulated advice firms was just under £685,000 last year, around £143,426 per adviser, up from £121,044 in 2016.
Advisers are also keen to build on the capacity and size of their firms, with the report finding many are happy with the current state of their business and want to have the capacity to service more clients.
However, there remain some challenges for the profession.
Pimfa says while funds under management have risen steadily over the past couple of years, dropping Isa subscribers and a notably bad drop-off in cash Isas of 33 per cent remain concerning.
When surveyed by Pimfa, advisers said their biggest cost concerns for 2018 in terms of time were compliance and regulation, followed by client engagement.
Pimfa says: “Digital offering to clients was the next biggest cost, which is good to see as it could well have some good client engagement benefits. Management and operational duties and suitability were both seen as the next most costly, with pension changes, salaries and technology security the last items in terms of expense.”
Advisers also said the Financial Services Compensation Scheme levy had been burdensome, despite the regulator’s May ruling that providers will pay a quarter of bills in the future.
The report says: “The FSCS levy is seen as unfair and not necessarily enhancing the profession [and] the Beaufort situation did little to reassure clients that investing is a good thing.”
Pimfa adds: “This point could also of course relate to how we view our industry, and the more we see firms and the industry, as a whole, in a good light, the more likely we are to see new clients and a respect for the industry and what it stands for.”
London-based DFM Beaufort was placed into insolvency this year following investigations in both the UK and the US with the FSCS set to compensate around 2,700 clients due to money laundering and fraud.
Advisers said they support new cost disclosure rules under Mifid II and are expecting next year’s challenges to lie mostly in the pensions space.
Pimfa says: “There is a worry that some clients do not know what is good pension advice and what is not, and there is a concern when advisers try to charge appropriately and clients not always wanting to pay a fair fee.
“This was seen as a threat as many clients could opt for poorer advice based on price alone.”
Advisers are feeling generally positive about the future however, with many of them looking to develop a “family feel” in their services to clients.
Pimfa says: “Quality was a major point made, as in good long-term relationships with clients and making sure that their firm had a solid reputation, with less focus on transactional advice.”