The latest picture emerging from respondents to a survey of IFAs to assess readiness for changes imposed by the RDR indicates growing confidence in the future, clear progress with implementing regulatory requirements and the creation of sustainable revenue streams post-RDR.
The IFA firms that took part in the survey were a good cross-section of the industry. The survey results, viewed in total, indicate a group of IFA firms that have had the confidence to take decisions on areas such as segmenting their client bank, their status post- RDR and talking to clients about paying fees with, in the main, noteworthy results.
In line with many other surveys, the vast majority of firms who responded to the IFA RDR Benchmarking Survey said they would remain independent after the RDR, with only 6 per cent saying they would move to a wholly restricted model.
The survey respondents’ progress towards RDR is impressive. When asked how far their firm was along the path to RDR compliance, 60 per cent of respondents felt they were more than 80 per cent ready.
We tested this claim by also asking the firms which of the RDR milestones, identified by MM Academy and Taxbriefs as key to RDR compliance, they had completed. The results showed that in the majority of cases, respondents had over- estimated their readiness but, in the main, not by much. This differs from a pilot study carried out late last year, where the gap was much wider. This indicates that IFA firms are now more aware of what needs to be done and are realistic about how much has been achieved. Interestingly, the results showed no relation- ship between the size of a firm and its progress towards RDR readiness.
For those who are cautious about introducing fee-based advice with their clients, the survey provides some encouraging results. We asked those firms which had spoken to their clients about their new charging structure (64 per cent of respondents) to tell us what per- centage of their clients had agreed to the new regime.
Half of the IFA firms who had briefed clients had achieved a 100 per cent success rate and the rest had varying degrees of success but most were showing more than a 50 per cent success rate. This confidence in charging fees is reinforced by the very small number of IFAs (3 per cent) who used “willingness to pay a fee” as the primary criterion to segment clients. Most used “investable assets” (31 per cent) and “profitability” (28 per cent) to segment clients.
To assess the level of fees being charged in the market, we set several advice scenarios for the participants and asked what advice fee they would charge. The results provide some early evidence that the market is moving away from the much mooted 3 per cent initial charge plus 1 per cent ongoing.
For pension transfer advice, the average initial charge for advice was 2 per cent, for investment advice it was 2.5 per cent and for income drawdown it was 4.3 per cent. The averages hide the wide range of fees stated by the participating firms but the most common charges were 1 per cent for pen- sion transfer advice, 2.5 per cent for both investment and drawdown advice. Over two-thirds of the firms taking part were charging an ongoing fee based on the percentage of a client’s assets and the average rate was 0.89 per cent, with the most common rate being 1 per cent.
One of the concerns of the industry is the viability of IFA firms post-RDR, so we looked at what firms were charging, how many active customers they claimed to have, their “funds under advice” and several other factors to assess how hard a firm would have to work to maintain its current revenues. Based on the data given, the average annual revenues from the annual review charge was £279,400 a year.
To fill the gap between the annual review charge revenues and current annual revenues, if there was one, the average firm would have to give investment advice on assets of £5,819,000. This, in turn, equates to 0.88 new clients a week and assumes each client has an average investment portfolio of £173,500.
An interesting fact is that 32 per cent of the firms which supplied data are set to receive more in review revenue than they currently earn in annual revenues. This suggests that, if the data supplied regarding assets under advice is correct, some IFAs could afford to fine tune their annual charge to supply a more competitive service.
The average IFA firm
The average number of RIs in the average firm is 4.6, with an average active client bank of 602 clients and average revenues of about £750,000 although most firms had revenues of £400,000 and below. Most respondents had a ratio of one RI to one support staff member and an average funds under advice of £47.5m. The average assets per client for firm’s that took part in the survey is £173,500.
The average RI in the survey manages 95 clients with total assets of around £14m, they conduct an average of 170 client meetings a year, of which half are held in their offices, and generate £150,900 revenue for their firm. A third of the average firm’s revenue came from new business from existing clients.
Most firms were wedded to platforms with 85 per cent using a platform as their main investment vehicle and 13 per cent using product provider wrappers. Very few of the firms were charging an hourly rate for initial advice, with 20 per cent charging based on a percentage of investment. Just over half the respondents said their firms adjusted the charge depending on the level of assets.
Almost half (48 per cent) of IFAs expected their assets under advice to be more than 50 per cent higher in five years.
The IFA benchmarking remains open at the moment for firms which would like to participate and compare themselves to the survey average. In return for their input, participating firms will receive a free sum- mary report comparing their performance to the average of all participants. To get involved, please send your name, email address and company name to support@ cimetric.co.uk. You will then be given access to the survey.
The benchmarking survey will also be run in September and December to assess progress as we get closer to the RDR deadline – we will let you know the dates for participating in these surveys.
David Lee is director of Cimetric