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Adviser profits up 20% but non-advised market share grows

Adviser profits leapt at both individual and firm levels in the first year after the RDR, research from Apfa reveals.

But the research also found that non-advised sales accounted for a greater share of the market last year than in 2012.

The trade body has compiled data on profitability and the number and segmentation of clients based on FCA figures and Apfa’s own research with NMG Consulting.

It shows the average revenue per firm increased by 3 per cent from £738,025 in 2012 to £759,651 in 2013. The average revenue per adviser rose by 6 per cent from £158,429 to £167,863.

Meanwhile consolidated pre-tax profits for adviser firms increased by 14 per cent from £835m in 2012 to £953m in 2013.

The figures are for ordinary activities before tax and relate to business generated by firms with an FCA primary category of “financial adviser”. However, Apfa notes the figures are shown before dividends and therefore may not reflect the full costs of running a firm.

The average pre-tax profit per advice firm was £189,281 in 2013, up 16 per cent from £163,027 in 2012. The average pre-tax profit per adviser rose by 20 per cent from £34,996 to £41,826.

Independent regulatory consultant Richard Hobbs says the profit figures are likely to have been affected by the fall in adviser numbers as a result of the RDR and the recovering economy.

He says: “The RDR has culled the weakest advisers so the average profit will go up even if performance has stayed the same.

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“A core part of advisers’ market is the self-employed and business owners so you would expect that, with the economy recovering sharply last year, businesses are making more profits and will have more money to play with.”

Apfa director general Chris Hannant says while advisers who have stayed in the market post-RDR app-ear to be doing well, there remains a “polarisation” between good businesses and those who are struggling.

He says: “The level of merger and acquisition activity suggests many are still looking to exit the market. The impact on the businesses of those who have not got their model right will become more apparent over the next year or so.”

The report also reveals the split between advisers’ income sources.

It shows 29 per cent of advisers’ income comes from pre-RDR invest-ment business, 27 per cent from post-RDR initial fees and 23 per cent from post-RDR ongoing service fees. About 15 per cent comes from commission on non-investment business and the remaining 6 per cent derives from other sources.

The survey also shows that 87 per cent of advisers’ overall income comes from independent advice while 9 per cent comes from restric-ted advice and 4 per cent from focused advice, which the trade body likens to simplified advice.

It found on average, adviser firms gained 23 new clients in 2013 on a net basis and had about 200 clients on their books. Firms also refused to take on an average of 13 clients over the year.

Hannant says: “There is an inc-reased focus among advisers on the type of clients who are of interest to them. This means some will be unprofitable or advisers will feel they cannot justify a fee that covers their costs.

“There is a challenge for the sector to develop new ways of delivering advice at a lower cost. But it also shows the need for the regulator to look at the cost of regulation and reduce it.”

The research reveals a significant increase in the proportion of non-advised sales. 

Among all financial services firms selling retail products, the split between non-advised and advised sales has risen from 41 per cent and 59 per cent respectively in 2011/12 to 50:50 in 2012/13.

Among advisers, the proportion of non-advised sales has risen from 28 per cent in 2011/12 to 33 per cent in 2012/13. The proportion of advised sales has fallen from 72 per cent to 67 per cent.

But Hobbs says: “As the RDR is still relatively new, lots of consumers do not know how to engage with advisers in a fee-paying world, and vice versa. My suspicion is, as the changes bed in, advised sales will stage a recovery.”

Adviser view: Nick McBreen

The increase in advice profits is a false dawn. The removal of trail commission would have a big impact on profitability, as will the hardening regulatory

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requirements on suitability, investment risk, due diligence. We are in a hiatus right now.”

Nick McBreen is an IFA at Worldwide Financial Planning

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