NZ independent financial advisers facing an imminent regime change can take heart from new UK data that shows the sector is flourishing there five years after a similar regulatory shake-up.
Figures published by the UK Financial Conduct Authority (FCA) this month reveal that about 90 per cent of the 5,100 or so retail investment advisory firms had five or fewer advisers working in the business.
Almost 530 UK mid-tier investment advice businesses employed between six and 50 advisers with only 42 firms boasting 50 or more on their advisory teams.
However, the FCA report says the mega-advice businesses employ 45 per cent of the entire 26,677 UK retail investment advisory force as at the end of last year.
But scale hasn’t translated to higher profits for the advice behemoths, which were the only group to suffer losses – of approximately £540,000 per firm – in 2018.
“… firms in the 6-50 adviser category have the highest average retail investment revenue per adviser at £194,000 (up 13% from £171,000 in 2017). Firms in this category have shown the highest growth on 2017 with average total revenue per firm up 11% and average pre-tax profits up 28% on 2017,” the FCA says. “In contrast, firms with over 50 advisers showed only a 3% increase in revenue per adviser, a slight decline in average total revenue (down 2%) and an increase in average reported losses per firm from £162,000 to £539,000.”
In fact, single investment adviser businesses in the UK reported almost the same revenue-per-adviser (£164,000) as the 50-plus cohort while also raking in annual average pre-tax profits of close to £90,000.
As reported above mid-tier firms enjoyed the highest revenue-per-adviser but smaller advice groups (two to five advisers) were not far behind with the average adviser in this category bringing in over £187,000 in 2018.
Financial advice firms, as defined by the FCA, earned over 83 per cent of their revenue from investment advice in 2018 – the balance made up by insurance (11.6 per cent) and mortgages (5 per cent).
The UK regulator also filed similar data on insurance intermediaries and mortgage brokers that found both sectors in good health across all firm sizes.
In total, the three advisory groups pulled in £23.5 billion in revenue over 2018: insurance advisers earned the lion’s share (£17.1 billion) followed by financial advice firms (£5.1 billion) and mortgage brokers (£1.3 billion).
“Commission remains the dominant source of revenue for mortgage and insurance broking, accounting for 79% and 84% of revenue respectively,” the FCA report says. “For retail investment business, commission accounted for 17% of revenue while fees/charges accounted for 80%.”
Since the introduction of the Retail Distribution Reforms (RDR) in 2013, the proportion of revenue earned from commission in financial advice firms has fallen from 40 per cent to the latest measure of 17 per cent. Similar to the Australian ‘future of financial advice’ reforms introduced about the same time, RDR banned trail commissions but with grandfathering provisions for existing arrangements.
RDR also established a division between ‘independent’ and ‘restricted’ advice where the former must be free of any product provider controls and cover whole-of-market solutions: anything else falls under ‘restricted’ advice.
According to the 2018 FCA figures, almost 90 per cent of financial adviser firms deal only in independent advice, 10 per cent in restricted and 2 per cent in both. However, restricted advice represented 37 per cent of all financial adviser business revenue in 2018, up 4 per cent since 2016.
The FCA study also found total financial adviser business professional indemnity insurance rose 16 per cent in 2018 from £81.7 million to £94.4 million “which largely reflects the growth in revenue earned by these firms”.
“Premiums paid in 2018 for renewal of professional indemnity insurance (PII) cover remained steady as a proportion of revenue (around 1.5% across all firm types),” the report says. “The smallest firms pay a higher proportion of their revenue at around 4%.”
While many UK advisory businesses may have profited under the RDR, the regime has been criticised for jacking up the cost of advice and limiting access to high net worth individuals.
The RDR is currently under review with submissions to the FCA closing off early this month.
In a statement this May, Christopher Woolard, FCA head of strategy and competition, said: “Consumers and the market are changing rapidly, as technology, employment patterns and inter-generational challenges change the way consumers interact with financial services.
“As well as looking at how the market has evolved since RDR and FAMR [Financial Advice Market Review], it’s important that our work looks ahead to see how we ensure that this important sector works well in the future. We want the market to deliver a range of good quality, affordable advice and guidance services that meet consumer needs.”
Published in 2016, the final FAMR report addressed a number of questions such as:
- providing affordable advice to consumers
- increasing the accessibility of advice
- addressing industry concerns relating to future liabilities and redress, without watering down levels of consumer protection.
The FCA plans to publish the findings of its RDR review next year.