There’s been a slight downward trend in the proportion of advice, as measured by value, attributable to the independent advice sector. According to the FCA, the proportion of advice firms’ total revenue that went to the independent sector was 63 per cent in 2018 as compared with 67 per cent in the previous year.
And that slight fall continues the trend from 2016, which saw a similar gentle decline both in absolute and relative terms. Taking both restricted and independent sectors together, overall revenue is up – with the restricted sector gradually making ground.
The data comes from the FCA publication, The Retail Intermediary Market 2018, which was issued in early June this year.
The resilience of the independent advice sector has been one of the more surprising features of financial advice since the launch of the Retail Distribution Review. Independent advice would wither on the vine, predicted many highly regarded commentators whose names we will not mention to spare their blushes.
The reasons for the predicted rapid decline in the IFA sector were persuasive. For one thing there are so many degrees of potential restrictedness – the label covers so many possibilities. Very importantly for larger organisations, being restricted has the potential to simplify things greatly and cut costs – with more focused training, potentially fewer mistakes and a clearer proposition generally. That could be reflected in lower charges to clients, higher profits for the advisers or possibly a mix.
So, for example, a restricted advisory business could decide to use just one platform for all its clients more or less regardless of their circumstances. That might just be possible for a few IFAs but the FCA has issued guidance in the past and the consensus among advisers and compliance specialists is that using a single platform could be risky unless the clientele is remarkably homogeneous.
The investment proposition of a restricted business might be very narrow and simple or it might be pretty much as broad and whole of market as any IFA’s. And as with platform simplicity, paring down the investment proposition might lead to lower charges to clients and/or higher adviser profits.
Similar arguments apply to protection business, but with the additional incentive of potentially higher commission payments that could be used for the benefit of clients, the advisory firm or a combination of both.
The attractions of independence
Some of the largest advisory businesses are restricted and the status doesn’t seem to cramp their style or inhibit their success. They assert that clients don’t care about the adviser’s regulatory status if they have confidence in the adviser personally and in the business that he or she works in.
In fact, many commentators argue that the word “independent” is not generally positive in many other commercial contexts. Independent retailers and other businesses tend to be generally regarded as less effective and substantial than larger organisations.
The investment proposition of a restricted business might be very narrow and simple or it might be pretty much as broad and whole of market as any IFA’s
And yet despite all these arguments, as we have seen, independence is a fiercely popular idea with financial advisers. It is probably even more important to them than to their clients. We know from anecdotal evidence and from the very slow decline in the numbers of independent advisers and firms, that whenever a large firm, usually restricted, acquires a smaller business there’s a good chance at least some of the advisers will break away and start new businesses. They typically see this as a springboard into running their own set-up which will probably be independent.
There are sound reasons for advisers to stick with the independent label. “IFA” is a great brand and has become almost synonymous with “financial adviser” for many people. Plenty of accountants and lawyers still seem to prefer to deal with independent advisers. The press generally supports the independent sector for the most part. One adviser told me recently “restricted” is not a great description, although it is not a term that figures prominently in the marketing collateral of most restricted firms.
Although plenty of advisers do so, if you have been an independent all your working life it is a quite a wrench to make the change to calling yourself restricted, or finding various ways of avoiding the word.
The attractions of being independent may be more important to advisers than their clients, but unless the regulator suddenly and drastically changes the rules, I predict independence will survive for many years to come.
Danby Bloch is chairman of Helm Godfrey and head of editorial strategy at Platforum