A manifesto to better support independent financial advisers
For Professional Investors Only
CAPITAL AT RISK
They discussed the fact that when a business owner sells to a consolidator he or she is immediately able to access a great deal of support and help. But there is little done between independent firms to provide support if they do not choose this route. Amongst the key themes to emerge was a desire for firms to work better together to create an independent academy to encourage those coming into the profession to join independent businesses.
We do not claim to have answers to all these challenges. However, we aim here with this white paper to fuel the debate as we continue to work with those partners who have chosen Albemarle to find ways to support their independence and grow their businesses.
Charlie Parker, Managing Director,
Albemarle Street Partners
Foreword
At Albemarle Street Partners we work with a group of financial advisory businesses which are making their way as independent companies at a time when much of the sector is engaged in rapid consolidation.
In December 2021, a group of chief executives sat down to discuss this challenge and there was one key sentiment that came out;
Shaping the future of independent advice
How will independent financial advisers thrive in the era of rapid consolidation?
1
Independence matters
What has been the impact of consolidation on client outcomes?
2
What can we do about it?
A five-step manifesto to support the independent advice sector
3
The power of a centralised investment proposition
Why a structured investment solution supports independent firms
4
Introducing Albemarle: the boutique investment partner for independent firms
Discover how we have built our business to support the independently-minded IFA
5
The research in full
Explore the range of issues we analysed with leading financial advisers
6
Contents
The financial advice market is in a period of rapid consolidation but for advisers who want to retain their independence, it is critical they come together to shape the future of advice for the benefit of their businesses and clients.
In light of the dizzying rate of consolidation that continues to eat into the independent advice market, Albemarle Street Partners in conjunction with leading chief executives from independent firms has created the Coalition of the Independent.
This collection of forward-thinking advisers understand the merits of ensuring the continuation of smaller advice firms and has set out an action plan of practical changes that ensure a vibrant future for advice.
Under the Coalition of the Independent’s action plan, the independent financial advice market cannot just survive the lure of consolidation but thrive.
While consolidation in the advice market is not a new phenomenon, a demographic shift and ramp-up in regulation has made it increasingly prevalent in recent years. The introduction of the Retail Distribution Review (RDR) sped up the process in the early 2010s and subsequent regulation - including Mifid II, PRIIPS, and most recently the Investment Firms Prudential Regime (IFPR) - all ensured it became more economically viable to be part of a large network than a one-man band.
Shaping the future of independent advice
Independence matters
While the cards may sometimes seem stacked against smaller players, this does not mean independence isn’t worth fighting for. The impact of a shrinking advice market and the lack of choice it brings for consumers is a major concern for advisers.
A recent survey of 49 advisers by Albemarle revealed nearly three-quarters (73%) believed the consolidation of the advisory market had not been positive for clients.
A staggering 59.1% of those polled said the main drawback of a more consolidated sector was a ‘weaker focus on the best interests of clients’, while 28.5% said the main drawback was ‘less individualised financial advice’, and the third biggest issue with consolidation was ‘a loss in the diversity of approach across the sector’ (12.2%).
At a roundtable of advisers held recently by Albemarle Street Partners, firms explained why they will resist the pull of consolidation and remain independent.
The pull is real and persistent: of those surveyed by Albemarle, 84% of advisers had received at least one approach to sell their firm or book of business in the past year. A huge 73.4% of advisers had received three or more approaches, with another 8.1% receiving two approaches and 2% receiving one approach. Only 16.3% of the advisers asked had not received any offers.
Overall do you believe consolidation in the financial advisory market has been positive for clients?
Ray Tuffield, managing partner of Courtney Havers LLP, was wary that consolidators are trying to ‘squeeze advisers into hubs’.
While economies of scale are usually a boon to adviser businesses that sign up, Medical & Financial director Simon Dickerson warned that they ‘don’t appear to benefit the clients’.
Justine Roberts, director of Medical & Financial, which specialises in advising medical professionals, was similarly defensive of her clients.
‘I almost don’t trust anybody else to look after them. We don’t want them to be taken advantage of by having to pay fees that are charged too high, or worry that they’re not being looked after properly by a firm trying to make square pegs fit into round holes.’
Richard Read, director of City-based Augustine Financial Planning, described his firm as ‘fiercely independent’ and will remain that way for his clients.
Andrew Moore, managing director of Alexander Beard Group, has chosen to use a panel of providers. He said
He said that as the company had grown ‘it has become harder and harder to manage the various different recommendations of the advisers’ and as ‘product governance regulations came in, it was turning into a nightmare’.
The Coalition of the Independent is calling for modest, practical steps to make it easier for advisers to continue trading as a one-man-band or smaller business, by tackling the problems of succession planning, recruitment, regulation, and fees.
There is no denying that the independent advice market is highly fragmented, with more than 26,000 advisers registered with the Financial Conduct Authority (FCA) in 2019. While it may be easier for the regulator to police a smaller number of larger firms, the cannibalisation of the sector leaves clients with less choice and at the mercy of homogenous financial plans and high fees.
By coming together with one voice and pushing for change, advisers can shape the future of their profession.
What can be done about it?
Action on the cost of borrowing that will help advisers meet capital adequacy standards and allow them to grow through acquisitions
Succession planning has been a perennial problem in the advice profession and with the average age of advisers remaining stagnant, the issue looks set to remain.
The lack of internal succession planning has been paramount in the rise of consolidators, hoovering up small advice firms when their principals finally decide to retire. With no one to pass the business to, the cash-ready consolidators can swoop in.
But advisers are concerned that too many advisers are succumbing to consolidators for lack of any other plan. Part of the issue is the difficulty smaller firms have in raising cash to buy-out peers.
The Albemarle survey of advisers found that while 16.6% of advisers want to grow through acquisition and have a plan, another 8% wanted to acquire other firms but did not know how to finance it, and 2% wanted to acquire but didn’t know how to find opportunities.
At the roundtable discussion, business owners outlined the difficulty they have in investing in their business as they are limited by borrowing restrictions and the FCA’s capital adequacy demands.
Adding to the complexity around capital adequacy is the Investment Firms Prudential Regime (IFPR) that will be implemented this year and could well increase the regulatory capital requirements of firms that fall under this regulatory umbrella.
Step 1
George Goward, managing director of George Square Financial Management, said the FCA ‘makes it so difficult for companies in the mid-size’ to be able to take on another firm due to capital adequacy rules.
He added the FCA needs to consider making it ‘easier to borrow’.
Tuffield agreed that the borrowing options for firms are limited as traditional lenders have not historically wanted to help.
He argued that while ongoing fees are not a guaranteed income stream it is a ‘secure income’ that should be recognised by lenders.
Increasing education and awareness of advice as a profession at a grassroots level
The problem with succession planning is multi-layered and one of the underlying issues is a lack of new recruits choosing advice as a career path. While there have been a variety of schemes designed to attract younger generations into the industry over the years, they have had limited positive results, with law and accountancy continuing to trump financial advice as careers of choice.
Retaining and recruiting staff is a serious concern for firms. When asked to rank their concerns, retaining staff was logged as the second biggest concerns, with recruiting staff coming in third.
While there are a handful of financial planning degrees available to students in the UK, the path to becoming a financial adviser is not an obvious one, and there is little encouragement to join the profession.
While lucky breaks are inherent in climbing onto and up the career ladder, recruiting the next generation of financial planners should not be left to luck or chance. Promoting financial advice as a viable career option for young people at a grassroots level should be made a priority for the industry.
Step 2
Cathy Nolan, an adviser at Burton & Fisher Financial Services in Lancaster, is already Diploma qualified and holds the CF8 long-term care accreditation at the age of 24 but she did not set out to be an adviser.
She went straight into banking from sixth form where she ended up as a ‘small cog in a big machine’, and although she made a fortuitous leap into financial advice, it was not presented as an option.
Nolan warned of a ‘missed generation’ of advice, due to the lack of promotion of the career and said firms face a ‘generation gap’ if older advisers are not more forward-thinking in their succession planning, bringing new blood into the industry before it’s too late.
What is the biggest challenge of independence?
Creation of an independent academy of advisers to encourage advice as a second career
The Coalition of the Independent has recognised that a steady stream of entrants into the advice market is vital to the survival of smaller businesses. Without new blood entering the market, older advisers could be forced into the arms of consolidators as a last-ditch succession plan.
FCA statistics show the average adviser in the UK is over the age of 50 and there are few new recruits coming into the profession, with law and accountancy continuing to be the preferred career path of choice of younger people.
Having qualified as an adviser, West found a self-employed role through a connection in his local area but has since decided to take a salaried role at an advice firm. New recruits are vital for firms to grow and when surveyed by Albemarle, 46.9% of advisers agreed with the statement ‘we should focus on attracting and incentivising good, employed advisers’.
Just 6.1% believed businesses should attract self-employed advisers and 38.7% said ‘both employed and self-employed approaches can form part of growing our business.
Whether salaried or self-employed, recruitment is a pressing issue. The recruitment gap in the profession could be filled by those who have lost their jobs in the coronavirus pandemic or who are just looking for a career change. With greater promotion of the benefits of becoming an adviser, the flexibility it can offer, the rewarding client outcomes, and the potential for plentiful remuneration, this gap could be closed by new, older recruits who bring with them a host of life experiences.
Step 3
This problem could be tackled head on with the promotion of financial advice not just as an option for those setting out on their careers, but for people planning a career change. The more people who are encouraged into the profession, and the more pathways they are given, the greater chance of smaller advice firms remaining independent.
Merseyside-based Alastair West decided to switch career paths at the age of 40 after a two-decade career in IT. He used the Covid-19 pandemic to complete his Diploma level training in just six months and said he was drawn to financial advice as it provided an opportunity to use both his problem solving skills and work face-to-face with clients.
West said the life experience he brings to the role is beneficial, even if he isn’t from a finance or sales background and the Diploma qualification has provided the technical skills and regulatory knowledge to carry out the job. However, he said further people could be encouraged into the sector if there was a greater focus on the soft skills needs to be an adviser, such as conducting a meeting and ensuring all aspects of a financial plan are spoken about in a natural way.
Addressing the cost of compliance in the reform of FCA and FSCS fees to ensure smaller firms are paying a proportionate sum for regulation
The cost of compliance for advisory firms is a perennial problem, with smaller firms shouldering an increasing burden of FCA handbook complexity and the corresponding regulatory costs.
However, the biggest cost for advisers is the Financial Service Compensation Scheme (FSCS) and the rising expense of professional indemnity insurance. Following research by PIMFA, it warned that FSCS levies have increased to ‘unsustainable’ levels in recent years, and found 45% of advisers it surveyed had seen their FSCS costs rise by over 100% in the last five years, while 26% had seen professional indemnity premiums rise over 100% in the same timeframe.
When asked what goals the advisory community should be pushing towards, many advisers polled by Albemarle mentioned reform or overhauling of the regulator and the fees advisers pay.
One major bone of contention with the regulator and the FSCS within the adviser profession has been that financial planners feel their share of the regulatory fee is disproportionate to the amount of complaints made to the FCA and the number of claims made to the FSCS that concern their part of the financial services industry.
Dickerson agreed with the statement that ‘the regulator is happy to see far fewer firms through consolidation to provide a more structured market place to regulate’ when asked for their opinions on the regulatory environment.
This is a prevailing theme within the adviser community, with a vast majority – 87.5% - of advisers also agreeing with this statement when polled by Albemarle.
Just 6.2% of advisers agreed with the statement: ‘it is a priority for the regulator to provide a supportive environment for smaller independent firms’.
Step 4
Simon Dickerson, a director at Medical & Financial, said if he could encourage advisers to join together to push for one achievable goal, it would be a ‘reduction in regulatory cost and burden’ and a ‘fair, risk-based FSCS levy’.
‘The FCA’s definition of a small firm is quite different from a typical small firm,’ he said.
Encouraging light-touch regulation that is proportionate to the size of the firm but also focuses on creating positive outcomes for consumers rather than just preventing poor outcomes
Proportionate regulation of advisory firms, including fairer FCA and FSCS fees, chimes with adviser calls for lighter-touch regulation for those firms that cause the least harm to the financial services industry.
Coping with regulatory pressure was the top-ranked issue for adviser firms polled for the Albemarle study, with
and
% of respondents names it the most pressing issue
% of advisers ranking it either second and third most important.
While lighter-touch regulation of businesses may seem self-serving, it is quite the opposite. Currently, regulation is focused on preventing poor outcomes which necessitates the need for heavy-handed rules, punitive levies, and an overbearing burden for smaller firms. If the regulator shifted its focusing towards creating positive outcomes for consumers, the need for regulation would be lighter and the burden for smaller advisory firms may not be as great. This would enable advisers to help more people as the cost of advice would reduce.
By focusing on positive outcomes for consumers, not only would the cost of taking advice reduce ensuring advice was available to more consumers but it would see a greater number of consumers benefit from positive outcomes, meaning there would be fewer claims for the FSCS, creating a virtuous circle for regulation and claims.
While 36.7% of advisers asked believe a more consolidated sector makes for an ‘easier sector for the regulator to monitor’, Read is a dissenting voice.
Read said in discussions with regulators, they say they support small and medium-sized business and he believes the FCA is not interested in regulating a handful of large IFA firms that do not have clients interests at their heart like smaller businesses do.
However, he said it is a ‘political game’ and the regulator ‘has to be seen to be looking after the Retail Plan and that is costly for the small businesses because we don’t have the economies of scale they have in the bigger businesses’.
Step 5
Commenting at the Albemarle roundtable event, Richard Read of Augustine Financial Planning, said:
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How does a centralised investment proposition help?
Growing an advisory business, providing consistent investment plans for clients, all while ticking the right regulatory boxes to maintain independence is no mean feat.
It is no wonder so many advisers have felt compelled to sell to consolidators. Retaining the prize title of independent may be more difficult but with the right help and support, advisers can continue to offer their clients the best financial planning that includes a consistent, measurable, and reliable investment proposition, and future-proof their businesses.
Putting a centralised investment proposition (CIP) at the heart of your advice process can be a benefit for both your clients and your business. There has been a long-running trend for advisers to adopt CIPs and managed portfolio services to enable them to create more predictable financial outcomes for their clients.
When polled, advisers confirmed that a CIP can help an independent firm to deliver consistent client outcomes and grow as a business, with 65.3% agreeing with the statement, and just 16.3% disagreeing.
However, there is scope for more advisers to outsource their investment functions, with just 40% of advisers outsourcing their investment management or research function, and another 14.5% stating they were exploring it as an option for their business.
At Albemarle, we know an advisers’ time is precious and better spent face-to-face with clients building their financial futures, and our team is dedicated to finding you the most compelling investment opportunities across the universe of funds, ETFs, shares, and investment trusts, to create both active and index portfolios.
As technology sits centre stage in adviser businesses, our managed portfolios are available across platforms.
Outsourcing investment solutions means advisers can access a diverse and actively managed portfolio of investments that dovetail with your clients’ risk profile and objectives, without losing any control of your clients.
By providing clients with an improved investment proposition, you can also help to future-proof your business. Financial advisers are freed up to focus on the most important part of their business; their client relationships.
Outsourcing investment has practical benefits, such as providing access to specialist expertise, reducing business risk, and by offering tailored portfolios with different risk profiles to clients, advisers are also fulfilling their regulatory requirements.
In short, by taking out the complexity and time-consuming nature of putting portfolios together, advisers can get back to doing what they do best: advising their clients.
Do you believe a centralised investment
process can help your firm deliver consistent client outcomes and grow as a business?
About
albemarle
with Eleanor Williams,
partnerships director
Q&A
About the respondants
Overall do you believe consolidation in the financial advisory market has been positive for clients?
When you think about business models how do you think you should grow?
What is the biggest challenge of independence?
What do you consider to be the main benefits of a more consolidated financial advice sector?
What do you believe are the main drawbacks of a more conslidated financial advice sector?
Would you like to grow your business through acquisition?
Do you believe a centralised investment
process can help your firm deliver consistent client outcomes and grow as a business?
Do you currently outsource your investment or research function to external providers?
Our Research in full
Our research was conducted between January and February of 2022 through online email survey.
Eleanor Williams
Partnerships Director
eleanor.williams@aspim.co.uk
+44 7791 565 006
Sarah Kennedy
Partnerships Support
sarah.kennedy@aspim.co.uk
+44 7507 873 005
get in touch For more information
© 2022 Albemarle Street Partners All Rights Reserved. The information, data, analyses, and opinions contained herein (1) include the proprietary information of Albemarle Street Partners, (2) may not be copied or redistributed without prior permission, (3) do not constitute investment advice offered by Albemarle Street Partners, (4) are provided solely for informational purposes and therefore are not an offer to buy or sell a security, and (5) are not warranted to be correct, complete, or accurate. Albemarle Street Partners shall not be responsible for any trading decisions, damages, or other losses resulting from, or related to, this information, data, analyses, or opinions or their use. Albemarle Street Partners is a trading name of Atlantic House Investments Ltd, which is authorised and regulated by the Financial Conduct Authority (“FCA”).