Profits, people and price: Crunching the numbers on the advice market

Recent reports paint a picture of a generally buoyant market but concerns remain around business costs

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Two key reports have revealed the shape of the advice market in 2017. Apfa produced its annual review last week, followed a day later by an FCA report based on advisers’ regulatory returns.

The figures in the reports paint a picture of a market bringing in more money and attracting more advisers, but concerns remain over the costs of doing business.

As part of a series on the health of the advice market now and in the future, Money Marketing has dug into the latest numbers to benchmark where we are and understand the implications for advice firms.

Margin calls

Apfa’s latest analysis shows revenue was up significantly in 2016, rising from £2.75bn the previous year to just over £3bn.

This is partly due to the benefits of a percentage-based charging model in a rising  market. But advisers also say the boost in revenue can be attributed to clients seeking out their services due to events such as Brexit and the need to counteract low interest rates.

Addidi Wealth managing director Anna Sofat says: “For us revenue has been up for the last few years. Probably the RDR has helped, but what has also helped is the current complexity. People need even more help. Clearly there’s been lots of pension changes and regulatory change has also led to more need for advice.”

Revenue has increased despite advice firms taking on fewer clients. Apfa’s report cites figures from NMG Consulting showing a fall in the average number of clients from 213 at the start of 2014 to 166 at the end of 2016.

The number of firms earning revenue from retail investment advice rose from 4,864 to 4,970 in 2016. Apfa notes the number of advice firms in the market has now stayed stable for the last eight years.

Bucking the preconception of shrinking adviser numbers, the market added around 900 more advisers in 2016, growing from 23,864 advisers to 24,761.

But Apfa says pre-tax profit in the sector dipped from £835m to £779m, as profit margin as a percentage of revenue fell from 19.6 per cent to 17.1 per cent. Apfa puts this down to increasing regulatory costs.

The margins on advice look relatively weak compared to the asset management industry. The FCA’s asset management study last year found margins have crept up since 2012 to reach around 38 per cent.

EQ Investors director Jeannie Boyle says: “It’s very expensive to run an advice firm. Sometimes it’s hard for clients to appreciate what goes into producing what looks like a fairly simple suitability report.  There are lots of links in the chain.”

Sofat attributes margin pressure on a shortage of highly skilled advisers, who have begun commanding higher wage packets.

For others, the squeeze in margins is reflective of advice firms failing to keep pace with the market as it evolves around them.

Consultancy firm Scydonia director Innes Miller says: “What it points to is a lot of inefficiencies in advice businesses; advisers and paraplanners doing a lot of things they just don’t need to be doing.

“The whole investment management piece is one area. If they introduced outsourcing, they should be able to increase margins.”

He also points to examples of technological improvements, such as back office systems that save advisers “double keying” client information, that could boost margins.

He says: “Little things don’t make a difference, but aggregate them up and look at the efficiencies they generate and it does become quite significant.”

Boyle says firms can maintain and improve margins by looking at how client meetings and communications are conducted.

She says: “You have to look at the way you are providing services and if they’re the ones clients want and need. That may mean moving away from face-to-face, not necessarily to robo-advice, but looking at how you deal with clients. Not every firm is well placed to deal with the change in how people want to do business with us.”

Commission and restriction

Despite a slight dip in income this year, advisers are still making just over a quarter of their income from commission payments, according to FCA figures.

This reflects the amount of legacy products still in the market, but also the level of protection and mortgage sales made by advisers contributing to the numbers. In 2016, 88 per cent of advisers earned some revenue from insurance broking and 45 per cent do some form of mortgage advice. Yet advisers are only making 11 per cent of their revenue through insurance and 5 per cent from mortgages, suggesting these are still seen as optional extras.

Some advisers are concerned by the level of commission that persists in the market. Aurea Financial Planning managing director and former Institute of Financial Planning president Rebecca Taylor says: “It has taken some businesses a long time to move themselves on from commission. Some businesses, including ours, were pretty much commission-free apart from the odd legacy stuff at the point of RDR. Some businesses didn’t make the change until they were forced to.

“To get to that point now, where 75 per cent have moved to fees, is not as bad as I thought it could be. I do know how difficult some companies found it and how late they left it.”

While 80 per cent of all adviser payments were facilitated through providers or platforms, the anticipated move to restricted models has not yet materialised: 39 per cent of all charges come from restricted advice, largely flat year-on -year.

Small firms seem to be performing the best when it comes to getting the most from each adviser: firms with between two and five advisers make the most revenue per adviser at £143,937, compared with £140,003 for 50 adviser-plus firms.

But sole traders generate less revenue at £129,679 on average. While smaller firms continue to make up the bulk of the market by numbers (91 per cent have five advisers or fewer), half of advisers still belong to the top 1 per cent of firms by size.

First Wealth partner Claire Phillips says the concentration of large firms presents an opportunity for professional bodies to market the case for smaller advice firms.

She says: “There’s this perception that smaller is not necessarily good, that there’s a safety factor when going to a bigger firm, for example that they know more or have better kit or expertise. These figures show that’s not the case, that you can be the same or better off with a smaller firm.”

Fighting for the future

The direction of travel for revenue, profit margin and fees will be crucial as the advice market moves forward, bringing new advisers into the fold.

Taylor believes client-centric firms can continue to make good profits and attract new business.

She says: “There’s opportunities out there. People want advice. Needs are even more complex. But people want a little bit more for their money. Advice is so transparent now, and clients are looking for a really good service. If you can articulate what you do and justify fees, there’s opportunities.

“There’s enough people in the world for us all to look after somebody and make a healthy profit. Pre-RDR I could’ve made more profit by being a commission-based adviser. I wouldn’t want to go back to doing that for the sake of making more money. It’s not the right thing to do for the client. It’s not the basis of a profession to make as much money as you can out of it.

“The advice profession represents a massive opportunity for young people to come in, who don’t have all the preconceptions of the old world and how things used to be. You can earn enough money, have a very successful career, but you have to earn it now, not just sell things. That’s part of being a profession rather than a sales industry.”



Advice market turnover passes £3bn mark

Turnover in the advice sector increased 6.5 per cent in 2016 according to Apfa data. Revenue generated on regulated retail investment business by financial advisers rose from £2.75bn in 2015 to just over £3bn last year. An increase in fee income from £1.8bn to £2.2bn offset a £58m drop in net commission. Average revenue per […]


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There is one comment at the moment, we would love to hear your opinion too.

  1. “To get to that point now, where 75 per cent have moved to fees….” conflates two different sets of data and comes up, I believe, with a misrepresentation of the facts:

    FCA data from May shows that commission still accounts for 26% of total adviser firm revenue, which I find remarkable. The standard model still appears to be ad valorem contingency fees, paid from the product.

    Other than the product provider having previously set the tariff whereas this is now set via ToB or ‘proposition’ (jeez, how I hate that word)… this still looks like commission.

    So, I disagree that 75% of firms have moved to fees, although it does suggest some form of progression (!).

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