New horizons for financial advice

For evidence of this success, look no further than the FCA’s review of advisers’ retail mediation activities returns: total revenues for the sector rose from £3.9bn in 2017 to £4.4bn last year.

In a further rebuke to received wisdom, it is the smallest firms that are doing the best job of holding their ground. Instead of falling as many expected, the number of adviser firms crept higher last year to stand at just over 5,100. 

And rather than being overcome by the weight of regulation, it is the smaller players that are the most profitable: pre-tax profits as a proportion of turnover were much higher at the lower end of the scale, as Chart 1 shows.

Yes, this does not speak of a sector that is good at controlling its costs. And yes, there are questions as to how much of this boom in revenues – for advisers large and small – was predicated on defined benefit transfer fees that have now been put at risk by regulatory change and rising professional indemnity insurance premiums. The FCA estimates that an amount equivalent to 10 per cent of advisers’ total 2018 revenues may be eradicated by its contingent charging ban.

But be that as it may, there are two big structural reasons to be cheerful about the future of financial advice. The first is demographics; an ageing population means more people than ever before will be engaging with the wealth they built up in the boom years. And the pension freedoms era means they have more scope to do so than their predecessors. These factors should ensure the industry remains on a sound footing in the near term. 

Unfortunately for advisers, this state of affairs does not guarantee a stress-free life. While many regulators and politicians have appeared to agree that a flourishing advice sector is an important cog in a 21st century economy, there is a difference between a healthy industry and one that adequately serves the needs of the wider populace.

Individual advice companies may be able to discharge their responsibilities in a way that ensures their profitability. But the widening advice gap and fresh spike in mis-selling problems seen over the past three years means few will be able to rest on their laurels in the years ahead.

From threat to opportunity