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How to build an advice firm from scratch

The keys to success when building a new business

Apple co-founder Steve Jobs once said his model for a successful business was The Beatles: four parts that balanced each other so the total was greater than the sum of the parts.

In the financial advice world, most agree there is no such thing as the perfect planning firm, nor a textbook model for starting one from nothing.

The total number of advice firms registered with the FCA at the end of last year was 13,690, down from the 14,254 in December 2016.

The increasing insurance costs and regulatory changes putting pressure on smaller firms are also paving the way for consolidators and vertically integrated players to grow and capitalise.

The uncertainty around the UK’s imminent departure from the EU has placed many things up in the air and is affecting everything from recruitment costs to compliance requirements and the sorts of questions clients will be asking of their advisers.

Because of all this, advisers say there is no guarantee the 2019 market will be a welcome one for new players. But opportunities for fresh challengers are still there if start-up advice firms put the right building blocks in place.

With the new year just around the corner, Money Marketing spoke with advisers who have set up alone about how it can be done, and whether it is worth it.

Step 1: Creating a business plan

Red Circle Financial Planning director Darren Cooke says a prospective firm owner should expect to shell out about £25,000 in immediate start-up costs.

They should have about £3,000 to fund an office space and set up basic technology services, as well as sufficient funds to field any excess on their professional indemnity insurance.

With planners earning about £95,000 a year on average, those set-up costs seem relatively worthwhile, with plenty of advisers breaking even on their capital investment in less than two years.

The ability to plan for other costs is less certain, however. In the lead-up to Brexit, advisers say client requests are unpredictable and insurance costs increasingly worrisome.

The introduction of Mifid II and GDPR this year is also driving heightened compliance bills, while an increasing proportion of profits is being sucked up by the need to boost technology offerings as cybersecurity awareness heightens.

Addidi Wealth chief executive and financial planner Anna Sofat says the key to navigating these uncertainties is to begin with a strong service proposition.

She says: “The first thing you actually need is a name, because that will be tied to what you want to achieve, who you are, who you want to service and what you are about.”

Changing hands: Are clients losing out from adviser consolidation?

The proposition should include cost outlines, but also target markets and a timeline for getting set up.

Yvonne Goodwin Wealth Management principal Yvonne Goodwin says the first thought people may have is how daunting the process will be.

For prospective firm owners who are not completely confident on the exact steps to take, she says that money is well spent on getting external help.

Compliance support is likely to be the best initial hire a prospective firm-owner can make, he says.

Cooke says: “Everyone’s first hire is someone different, but you should choose the area you can imagine yourself finding the most difficult.

“For me, it was compliance, but for others, it could be legal support, an accountant, or even a marketing or communications professional.”

Adviser view

Mark Meldon, director, Meldon & Co

One of the best ways to start a business is to gradually acquire one. It is very difficult otherwise, especially at the moment. No one adviser can do or be everything for everyone, and neither can one firm.

I joined my firm in 1996, then acquired a quarter of it 2003 and the full firm in 2015, and then had to undergo a rebranding process to market it under my name. It is a challenge to run your own firm – I think starting alone would be difficult when you can join a firm, get to know it, then slowly acquire it over time.

Step 2: Authorisation and insurance

The authorisation process for new firms is relatively straightforward, but arranging business accounting and PI insurance can be the most time-consuming step of starting out, Cooke says.

When processing authorisation applications, the FCA looks to weed out would-be firms that do not demonstrate strong forward planning.

Authorisations consider the attitude of the applicant throughout the process and list the following positive indicators for acceptance of applications:

  • Applicant has read information on the FCA website
  • Applicant is making enquiries of the contact sent
  • Applicant has sought legal and compliance advice
  • Applicant can clearly articulate their regulatory obligations
  • Applicant is open and honest in all dealings
  • Applicant is proactive in supplying information

The regulator recommends six months should be set aside for the process of authorisation, a process advisers say is made more complex by PI insurance requirements.

Goodwin says: “The FCA doesn’t want to know unless you have your insurance sorted, which makes sense, but insurers also won’t look twice if the wheels aren’t already in motion with the FCA. I ended up buying time between the two and getting both to start on the same day.

“If you’re starting a firm under a network, this aspect is easier and less expensive.”

Sofat agrees the initial process between insurers and the FCA can be a “vicious circle”, but says prospective firm owners need patience.

She says: “Legalities and licensing are key factors and all tie into whether you’re directly authorised or in a network and whether or not you want to be a sole trader.

“Hopefully, these will have been the very first thoughts, because they connect back to your service proposition.”

Firms can begin running without authorisation, but should make sure their business plan factors in the cost of getting accredited with the FCA.

Authorisation fees depend on how complex the application is to process and can be a burden on sole traders.

Sofat says: “It also depends on the amount of documents and whether you’re required to provide anything additional.

“At a network, you’d get a compliance solution off the shelf to help out here and they would white-label everything and really hold your hand.”

For those looking to set up a new firm as a directly authorised adviser, having been an AR before can provide vital insight into the keys to success.

Cooke says: “If that is your situation, you’ve already been in the industry and likely know how things work, and can talk to other advisers and contacts about their experiences.”

Advisers looking to set up as ARs should also be wary of the payment processes at networks, too.

Sofat says: “Three to six months of cash flow that is worth your expected income is recommended here, because becoming an AR can have hold-ups that see it take quite a few months before you get paid.”

Both independent and restricted advisers must pass the same qualifications, but do not have to meet all of the same regulatory requirements, so could think over their preferred licensing arrangement while studying to prepare early for which path to choose.

Partnerships and networks are historically more likely to require their advisers to work under a restricted model, along with any wealth or investment group that also provides advice as part of a wider vertically integrated offering.

Meldon & Co director Mark Meldon says that despite his independent status, he would be more likely to encourage a prospective owner of a new business to run a restricted model in the current market.

He says: “It of course depends entirely on what you do, but my work and offerings are straightforward, and so if I were to do things again, I’d probably be restricted. That decision also affects how much insurance you’ll pay.”

Step 3: Technology

While practising IFAs tend to point the finger at technology as a troublesome burden, advisers say it is the easiest part of the set-up process when appropriate help is called in.

Kitting out offices with basic technology, including laptops and phones, is likely to result in a fairly minimal overall cost.

Sofat says: “The technology set-up is the fairly straightforward part, because you can just buy computers or telephones or whatever you need quite simply and work from wherever you want, even if you plan to move to an office space that isn’t ready.”

The process for setting up back-end systems can catch advisers out when trying to keep to the deadlines in their business plan, though.

Cooke says: “I didn’t expect that part of the technology side to be so time-consuming and there also needs to be a lot of time dedicated to deciding what tools you want to get set up.”

Cooke says he involved clients in the process of choosing risk-profiling tools and other pieces of technology, which also helped build good rapport.

Step 4: Bricks and mortar
While advisers agree a successful business can easily be run from home, clients are often more easily attracted to commercial offices, even when the firms in them are small.

Goodwin says that when establishing as a sole trader, a bricks and mortar office helped prove the firm’s credentials.

She says: “People always say that you won’t be able to manage on your own and expect you to be struggling from the garage or a room in your house, so for me it was important to have a physical office space straight away that clients knew they could come to.

“Choosing a place was one of the first steps, and it always involves looking at the sort of advice business you want to be for clients, but also considering the business structure you want to have for yourself.”

Adviser view

Kim North, managing director, Technology & Technical

If you’re setting up, it should be fairly easy to find space, set up a website and build your brand. The tricky bit is establishing it all while doing exams, as it’s about 200 hours of study time for each qualification.

Another difficulty is professional indemnity insurance as the market continues to contract. Attracting talent is becoming harder – they need brains and personality.

Step 5: Growing a brand

Data collected by Money Marketing last year found a great variety in the ratio of clients to advisers at firms, ranging from just under 50 to about 250.

For those who set up firms from scratch, advisers say word of mouth is the most effective way to build up client numbers.

Advisers moving from networks to becoming DA often need to grapple with restrictive covenants when it comes to acquiring clients at the new business, though.

Goodwin says: “When I first started, I was not allowed to contact any of my clients because of restrictions, but I found a lot of them ended up contacting me. When I first started, I had about 25 clients and they were all people I had serviced already.”

Informed Choice financial planner Martin Bamford says finding clients is a learning curve that will have upsides and downsides.

He says: “I started out the old-fashioned way, meeting people face-to-face at networking events and getting referrals that way. It has mixed results, and everyone acquires a few of the wrong clients, as well as some of the right ones, at the start.

“It’s all about gaining confidence and experience in what you do.”

While marketing is increasingly pushed as the missing piece of the advice business jigsaw, for many planners, it is the cherry on top of more fundamental aspects of the firm’s model when getting started.

Cooke says: “Marketing will often happen naturally as you start out, and then you can turn your attention to it when you’re up and moving.”

Sofat adds: “Getting a website these days is dead easy, and it’s not time- consuming. Anyone can get up and running easily with that.

“Really, the hardest part is that even with different bits of help, you really are doing everything by yourself, and things are your responsibility.

“If you want to have your own firm, you need to streamline efficiencies, understand from the off what you can and can’t pick up and do, plus get the compliance and legalities under wraps straight away.

“Work out what resources you need and start from there.”

Expert view

You need to start out knowing there will be an end

As you plan the set-up, direction and growth strategy of your fledgling business, it is extremely important to know you are heading towards an exit from the day you begin. All businesses have a natural lifespan, and the earlier you incorporate exit planning, the more control you have over what happens. There are some key factors which will help you build a strong business from the start and help improve your worth and value in the market, which you can incorporate right from the beginning.

Firstly, although your heart may be telling you to diversify from the competition and stand out from the crowd, the long-term value in an advice business will always be well-delivered pension and investment advice, with a clear client proposition. Around 90 per cent of business valuations are based on recurring income – if you are looking at building inherent value, focus on that.

Using technology in your business is also vital. Clear business processes underpinned by technology show you have a well-run advice ship. A strongly implemented back-office system linked to investment providers and platforms will give you real-time client data, essential for due diligence.

Thinking long and hard about your employment strategy when setting up is also crucial. Businesses built on self-employed advisers can create a great income and lower costs in the short-term, but bear in mind they detract from the value of your business, and many buyers operate an employed-only model.

Many factors you implement can be attractive at the point of sale and make good business sense from day one. If you have a blank piece of paper to start from, remember to include the end as you plan for the start.

Louise Jeffreys is managing director at Gunner & Co



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

  1. I started an IFA business from scratch back in 1990. I would say that £25k is a bit on the thin side as back then it cost me about £18k. But then it depends on how much you want to spend on refurbishing your office and the quality of the equipment you install.
    I don’t see the most important first step being mentioned – Getting authorisation from the regulator.
    The next omission seems to be the next most important – watch your operating costs. Why locate in a high rent area? Prestige rests with how good you are at the job, not where you are located.
    Personally I started out (and remained) a sole trader. Initially I just thought I’d see how it went, but then on weighing up the options of increasing the manpower decided I wanted to be an adviser and not a nanny of other advisers. Also adviser staff increases the business risk exponentially.
    Why incorporate? Does it really protect you? Look at some of the current cases. The regulator has a long arm. There are many more tax advantages to being unincorporated, not to mention Capital Adequacy. In this case you don’t need to have money sloshing around not earning anything.
    It’s all very well having high expectations, but always consider the downside. Be realistic. Business plans can look very nice but are largely a waste of time. Like life, business is an uncertain event. I have throughout assumed that you wouldn’t be so foolish as to borrow money, but fund the whole operation through your own resources. (Including not mortgaging your home). If you don’t have the capital you may be well advised to defer your plans until you do (have the wherewithal).
    Lastly it does help if you have some good professional connections.

    • The £25k quoted is what you will need for your Capital Adequacy and your PI excess now. Of course there are other costs including your FCA application. I went DA 3 1/2 yrs ago with c£20k (CA then was only £10k) although I moved from network so already had some things such as computers I just carried over.

      • You only need the £25k for CA if you incorporate. Assuming that you have at least that in other personal assets. For example a decent pension fund could qualify (assuming you are over 55) if you are unincorporated.

        • Christopher Petrie 7th December 2018 at 7:18 pm

          Any IFA who runs a business unincorporated is simply mad I’m my opinion!

          Why have the risk of a complaint from 30 years ago come at you when you’re 82 and retired years ago?

          My first piece of financial advice to any new IFA is ,.., go limited.

          (And I’ve never had a complaint yet btw)

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