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Abraham Okusanya: Small advice firms are far from dead

Small firms have never been busier, more profitable and optimistic about the future

In 1897, the New York Journal reported that American writer Mark Twain was dead. In fact, it was his cousin who had perished. This prompted Twain to politely inform the paper “the reports of my death are greatly exaggerated”.

You would be forgiven for thinking mistaken obituaries are confined to the 19th century. But there has been no shortage of headlines over the past few years on how small advice firms will die a painful, horrible death.

Pundits have cited everything from RDR and Mifid II to the rise of consolidators, vertically integrated models and robo-advice as some of the reasons they would not survive.

In fact, such factors have conspired in favour of small firms, not against them.

RDR amplified the value of independent advice, not diminished it. Unshackled from the limitations placed on their income by trail commission, advisers could demand a higher fee for their services.

The cost of advice has virtually doubled since RDR. That implies consumers recognise the value of good advice. In return for higher fees, advisers are more focused on the service they offer. I have no doubt the total cost of investing will decline in the coming years, but I wager that platforms and fund costs will bear much of the brunt.

Technology has also made life easier for advisers. Building a brand and acquiring clients is much simpler, and gone are the days of spending hours on the phone just to get a pension valuation.

There is no evidence that robos pose a real threat to human planners. Robos will invariably become tools for advice firms, helping them be even more efficient with onboarding, reporting and portfolio management.

And that is not all. Advisers can outsource almost everything these days. From paraplanning, compliance and admin to investment management and marketing.

All of this points to one thing: small firms have never been busier, more profitable and optimistic about the future. If anything, it is the large firms that seem to be struggling. You can count the number of these firms that make a profit on one hand. Even fewer make money from giving advice as opposed to the expensive in-house funds they peddle. It is no surprise product providers are buying up loss-making advice networks.

According to a recent FCA Data Bulletin, a solo adviser earns about £11,000 a year less than an adviser in a large firm. But an adviser within a small firm (two to five advisers) earns about £4,000 a year more. So, for all the institutional level support, marketing and branding, advisers in a large firm are no more “productive” than those in small firms. So much for efficiency of scale.

I am also not convinced that the operating costs per adviser in a large firm is less, given the layers of management oversight and compliance such businesses require.

Of course, all types of advice firm have been helped by the raging bull market of the past few years. Things are bound to be a little harder when the bear market hits.

But I bet small firms are better placed to adapt and trim their fat than big players burdened by large costs. Small is still very beautiful.

Abraham Okusanya is director of Finalytiq


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. In theory I would agree but take GPDR for example. Our last Gap Analysis identified that we needed to change very little and much of what we already did satisfied GPDR. There were 24 action points. 14 of them related to introducing new polices and procedures and other documents, 3 of them reconfirming what we already do and the rest writing down what we basically did already but in a GPDR recognisable format. The cost of doing what amounts to the same thing as before was enormous – it is this which kills small firms coupled with MiFID. While GPDR has been long overdue and is a good thing, MiFID is an ongoing cost. Both are too expensive and will kill smaller firms.

  2. Nicholas Pleasure 19th April 2018 at 4:19 pm

    Advice is not a scaleable business because it needs to be given by human beings.

    As soon as a firm gets too large it needs to employ managers and supervisors to control those advisers and this immediately removes the potential profitability of scale.

    However, Sam Caunt is correct. Every bit of new regulation means a reduction in profit or an increase in price.

    In a stable, competent regulatory environment small firms would thrive. However, it is very difficult to invest in a sector that could be removed overnight by the stroke of a regulators pen (£100K capital adequacy anyone?).

    Such a shame, because clients seem to like small firms, where they deal with one named person.

  3. Robert Milligan 19th April 2018 at 4:25 pm

    At last, a journalist who seems to know what he is writing about, Abraham, you are so right in what you have written,,, I can not understand how these big firms can afford to maintain their financial viability, far to many mouths to feed simply from an advice fee, the client will pay for advice, but not all the hangers on, including as I say, “The Monthly Car Park” advisers.

  4. Right on Abie baby! The demise of the small adviser has been forecast for at least 25 years now. In fact the small firm has better retention rates and fewer pro rata complaints than the big boys. They are alo far more likely to provide a unique and bespoke service rather than the second rate model portfolios and tracker funds for which the big boys are so wedded.
    Many smaller firms have a longer track record. I was a one man band and ran my firm for 25 years tilll I sold out. That is by no means unusual. How many big firms have an uniterrupted track record of even 20 years?

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