In the wake of the RDR, the FCA introduced new rules to stop vertically-integrated firms “unreasonably” cross-subsidising advice losses with profits from fund management.
While the latest figures show losses are mounting again at major provider-linked advice businesses, critics are questioning whether these rules are working.
Vertically-integrated giants including Quilter (formerly Old Mutual), St James’s Place and Hargreaves Lansdown have all successfully achieved overall revenue growth and turned profits in the past six years.
Yet, in terms of top-line numbers, their advice arms are continuing to struggle.
With vertically-integrated models growing in popularity, there are a whole host of firms that could theoretically benefit from cross-subsidisation by offering discount advice to generate margins from managing the funds.
Prudential and Aviva have both pushed in-house advice services in recent years, while national advice businesses Tavistock and Lighthouse struck a deal just last week to launch a new investment management company.
Investment manager Nutmeg announced a move into advice two weeks ago and its £350 price point caused many to question whether the planning service itself could be a profit generator, rather than the funds placed into the digital wealth manager’s portfolios.
Where the profits come from
Despite moves from the FCA to mitigate the risks of scale players gaining an unfair advantage over smaller firms, the ability for larger businesses to rely on product, platform and investment charges to pull in profit remains fairly unchanged.
The listing of Quilter this year contributed to a 42 per cent increase in post-tax profit at Old Mutual plc in the six months to June.
Old Mutual-owned advice network Intrinsic, however, reported an operating loss of £15.1m for the 12 months to December 2017.
Hargreaves Lansdown operates the direct-to-consumer platform Vantage, but also has around 100 financial planners in the business.
The firm made around 75 per cent of its operating profits through its platform for the first four years post-RDR.
Standard Life Aberdeen-owned 1825 is also still making losses three years since launching.
Assets under advice increased by £700m to £4.3bn for the first six months of this year for Standard Life Aberdeen as a whole, but 1825 recorded a £1m loss.
Standard Life Aberdeen’s platforms Wrap, Elevate and Parmenion generated £14m in profit.
Meanwhile, St James’s Place recently passed £100bn in funds under management after another quarter of positive flows, which were driven largely by pension product sales. A Money Marketing investigation in 2017 found its advice arm made losses of £25.7m for 2016, compared with profits for the overall group of £140.6m.
As SJP attempts to boost its adviser numbers even further, it tells Money Marketing that it currently “expenses things as they are incurred” between parts of the business.
The group also points to an increasing Financial Services Compensation Scheme levy as a cost drain for the advice side of the business.
The £15.4m FSCS bill for the six months to 30 June 2018 is £4.4m less for SJP than in the first half of last year.
Intrinsic chief executive Andy Thompson tells Money Marketing that each of the Quilter businesses are still aiming to be individually profitable.
The group added 300 advisers to its network this year through the acquisition of advice network Caerus, looking to boost profits.
Thompson says the full integration of advisers from Caerus has seen a needed productivity rise for its financial planners.
He says: “Advisers are through the transition period and average Caerus adviser productivity in all advice areas was up 8 per cent in the first six months of 2018 versus the same period in 2017.”
Thompson adds that its expansion of the Quilter Financial Adviser School this year is also evidence of its commitment to stand Intrinsic on its own two feet.
Previously known for its open programme which focused on training advisers for a career at any firm, the QFAS launched an Intrinsic-specific 58-week course last month.
Thompson says that heavy investment has gone into Intrinsic this year, which “illustrates the benefits of being part of a financially robust company”.
Intrinsic denied a permanent cross-subsidy arrangement last year, saying short-term advice losses will break even over time.
In numbers: Advice arm losses
Intrinsic: £15.1m (12 months to Dec 17)
SJP: £25.7m (12 months to Dec 16)
1825: £1m (six months to June 18)
The regulatory reasoning
Auditor Deloitte suggests that the FCA’s approach to regulation actually gives it a plausible reason not to crack down hard on the cross-subsidy of advice.
In a 2018 paper from Deloitte’s Europe, Middle East and Africa Centre for Regulatory Strategy, the audit giant says the regulator is only concerned when a cross-subsidy leads to ineffective competition, or direct negative outcomes for consumers.
Arguably, many large advice firms supposedly cross-subsidising are not charging less than smaller advice firms for financial planning, meaning that incumbents are not being put at a disadvantage in reality.
The FCA changed adviser charging rules for vertically-integrated firms to encourage more advice service developments two years ago, following a Financial Advice Market Review recommendation and public input, which supported the idea that cross-subsidy rules had reduced flexibility to take a short-term financial hit to develop new offerings.
The sort of firm cross-subsidies likely to prompt FCA intervention now relate to those which exploit vulnerable or low-income customers, Deloitte says.
While the rulebook change did strengthen financial advice firms’ ability to cross‑subsidise new automated advice models suited to lower-income customers, robo-advice services are not yet widely used by the likes of SJP, Quilter or Hargreaves Lansdown. Hargreaves chief executive Christopher Hill decided against further automated services with low-cost offerings in 2016, after its clients failed to support an offer for a basic robo service which would cost between £100 and £400.