Much of the advisory industry operated under the tolling of bells in the run up to the RDR deadline and critics feared clients would refuse to pay fees and would not understand the value offered by advice
A 37-page report from data firm CoreData Research – Adviser Fees and Business Models: Catching Up with Regulation – has shown that advisers spent much of 2013 implementing their charging model.
According to CoreData, advisers spent much of 2013 in transition and have now “worked out some of the kinks and what business and pricing strategies work in the post-RDR world.”
Under the RDR reformds, advisers had to create a business model based around fees.
Advisers said they now give their clients a choice in how they want to pay, with the options of upfront fees, hourly rates or a percentage based charge.
The majority (66 per cent of advisers) said they charge their clients a percentage of their investments, while 24 per cent operate a flat fee and 7 per cent an hourly rate.
The percentage charge ranges from 1 to 3 per cent, while the hourly rate tends to be £161 on average.
The big decision for many advisers in the run up to the RDR deadline was: what type of service to offer?
The question many advisers then needed to answer was: should I be independent and offer a truly whole of market operation, with all the insurance and research costs, or would it be better to be what the then City regulator termed a ‘restricted adviser’?
Before the end of 2012, 96.3 per cent of advisers said they offered an independent service. This has now dropped to 87.7 per cent, with the rest going restricted.
The most drastic change of the RDR was the end of commission.
It left many pondering where their income would come from, but now that the changes have been implemented, those concerns seem unfounded.
In 2011 initial and trail commission made up more than 50 per cent of an adviser’s income, now it makes up just 27 per cent.
Most of the income an adviser derives is now from fees, with upfront fees accounting for 34 per cent up and 37.3 per cent from ongoing charges. Initial commission now makes up 12 per cent of income while trail makes up 12 per cent, this is down from 36 per cent and 27.9 per cent respectively in 2011.
As predicted, many have moved towards high net-worth clients with pots worth more than £100,000, leaving opportunities for direct-to-consumer platforms and asset managers to target lower-end investors with products.
The CoreData researchers explained: “Much has been said about the so-called advice orphans and this most recent data shows the advice famine is coming into its own.
“As advisers make their business models leaner and set a higher level of assets they are able or willing to service, retail clients with smaller pots are due to be left by the wayside. This presents a considerable growth opportunity for asset managers looking to increase their presence in the direct-to-consumer market.”
Many advisers worried about their businesses going bust in the run up to the RDR deadline, but now the mood could not be more different.
Almost half (47 per cent of advisers) said they expected their revenues to grow by 10 per cent or more in 2014, 20 per cent expect revenues to stay flat, while only 7 per cent expect revenues to fall
The average financial adviser in the UK now has 240 clients, a slight increase on 228 clients in 2013.
But challenges remain, with compliance seen as the main concern this year, followed by attracting and servicing new clients.
So the much anticipated mass exodus of advisers has not happened, but one milestone awaits the sector in 2016 when trail commission can no longer be taken.
Interestingly, 13.7 per cent said they planned to leave the industry in the next three to five years, which would coincide with the end of trail commission.
However, the overall message from the report, according to CoreData, is that advisers are bullish on revenue and client growth, while worries about the ‘death of the adviser’ are of much less concern.
The majority said client numbers will grow over a one-year period while a third of advisers expect client numbers to rise by more than 20 per cent over the next five years.
Joshua Gerstler, adviser for Hertfordshire-based The Orchard Practice, said: “The impact of RDR on our business has been positive. Clients have valued the qualifications we have obtained and welcome the transparency of our fees. Combined with the positive mood surrounding the economy, our business has benefited enormously.”
Marc Shoffman is a financial journalist
