Advisers “substantially underestimate the threat” from direct to consumer (D2C) propositions and are “unduly optimistic” about their own businesses under the RDR, according to a new study.
The Challenge and Opportunity report, commissioned by BNY Mellon and Cass Business School, said the “unintended consequences” of the RDR, alongside changes in technology and social media, are likely to extend the advice gap for clients with limited assets.
The report said adviser numbers fell from 40,000 at the end of 2011 to 31,000 by the start of 2013, and that the remaining advisers were “unduly optimistic about their own business prospects in the RDR world”.
“We believe changes in the industry have as much to do with unfolding technological and competitive forces as with RDR itself – RDR is only part of the story,” the report said.
“We believe advisers substantially underestimate the threat from D2C offerings and are overoptimistic about future revenues from unchanging or slowly changing business models and loyal customers.”
The report said web-based services would be the biggest threat, particularly to advisers with a ‘low value’ client base.
“Indeed, earlier research by Cass has already identified that a significant proportion of the UK’s population would be willing to use a ‘financial guidance service’ instead of using a financial adviser to help them make their savings and investment decisions,” the report said.
“Today this non-advised technology is accessed directly by more than 6.5m private investors in the UK.”
Hargreaves Lansdown and Fidelity were cited as “two of the best known offerings”.
“The D2C platform market had £94.3bn in assets under administration as at September 2012,” it added.
“The growth of these platforms could continue to represent a considerable shift in the source of financial advice sought by consumers, given that the Cass research indicated that just more than 26m UK adults would not be willing to pay for financial advice.”
The report said with fees at roughly 1 per cent of assets, the average IFA client would need to have £150,000 to invest to sustain the £220,000 revenue required for a typical adviser’s business to function.
Advisers reaction to report
The report by BNY Mellon and the Cass Business School has highlighted direct-to-consumer investment as a key headwind for advisers – but do they see it the same way?
Philip Milton, managing director, Philip J Milton & Company
The question is, do clients know what they are doing and want to do it all the time? Are they sufficiently aware to know what they are doing? Do they really want the hassle and responsibility? I don’t think so. We are happy to deal with clients of all sizes, although the smaller ones must be subsidised by the larger ones.
Alan Dick, partner, Forty Two Wealth Management
D2C will probably grow significantly, and I agree some advisers are underestimating the threat – but a lot of people do not need financial advice and just need simple products.