As countries around the world entered lockdown in a bid to fight the coronavirus pandemic, economic activity in many sectors ground to a halt, and global stock market investors reacted by selling shares of the most affected companies, and causing equity markets to fall by more than 30 per cent.
The FTSE 100 has regained much ground since then, but remains 20 per cent below where it was at the start of 2020.
Advice companies that charge on a percentage of assets basis will therefore have suffered a drop in their total assets under management and so have less fee income.
There is also the potential for the sharp market falls and the general deterioration of market conditions to cause advised clients to remove their money from their adviser.
Key Points
- Many advisers are reliant on a percentage of the portfolio for fee income
- Clients have been prepared for stock market falls
- There are steps advisers can take if they are concerned about cash flow
But Minesh Patel, an adviser at EA Financial Solutions in London, says the impact on the day-to-day cash flow of his company has been minimal.
Mr Patel says: “It was a bit lower for one month or so, but the thing is we are a financial planning business; we do not claim that investment management is something we are better at than anyone else.
“We use cash flow modelling tools with clients and show them a range of scenarios, including a ‘catastrophe’ one, which is markets falling by 20 or 30 per cent.
“So most clients know they are in the market for the long term. We asset allocate as well; the exposure is not just to equity funds, but to multi-asset strategies, like Vanguard LifeStrategy, and those fell by maybe 8 per cent rather than the 20 or 30 per cent fall that occurred in equity markets.
“Some clients were worried by the falls, but we had a conversation with them and they felt reassured.
“I started out as an adviser in 2002, which was a recessionary period, so this will be the third recession I have worked in.”
One change that is likely to happen for Mr Patel’s business is that he has grown used to working from home, and has told the landlord of his office building that he will probably move out and work from home permanently.
He says: “Although our office is in inner London, most of the clients are in the suburbs, and 90 per cent of the time, I go to them.
“I don’t think it matters to them where our office is, and my business is quite mature. We are not actively looking to win loads of new clients, though if someone interesting comes along we will certainly look at it, so I don’t really see the need for an office in central London.”
Minimal impact
Philip Milton, who runs PJ Milton and Co, an advice company in Devon, says there has not been a significant impact on his advice business, but the discretionary fund management arm of his company does generate fee income from managing client assets, and this segment of his business is likely to suffer.
However, he said those advised clients who are placed into externally managed funds are charged a fee structure that is not linked to market movements, so the impact on his business has been minimal.
Paul Stocks, an adviser at Dobson and Hodge, an advice company in Doncaster says the impact on his business has not been significant.
He says: “While some of our revenue is fee-based, rather than as a percentage of assets, more of it is percentage of assets.
“And while that recurring revenue may have fallen in March, it will have been higher than expected in December, January and February, when markets were up a lot, so generally we find that these things smooth out over time.”
In terms of the reaction clients have had to seeing their portfolios fall in value, Mr Stocks says: “We have always told clients that events such as what happened in March are part of what we plan for, and they recognise that.
“We don’t do much new business; we do a lot of business that is existing clients wanting to add to their portfolios, and those clients have not reacted to the market fall.
“We had done most of the Isa business for clients by March, but the couple of clients we had who came to top up their Isas after the market falls didn’t blink.
“There was also a client who we had given the original advice to in February, and he invested the money after the market fell.”
Review cash adequacy
Matt Timmins, joint chief executive of support services business SimplyBiz, says there are steps advisers can take regarding their cash position.
“Review your existing cash monitoring and reporting systems and consider their adequacy for the current scenario.
“In these circumstances, cash flow models need to be updated on a daily basis, such that timely action can be taken to ensure the preservation of cash headroom.
“Understand the absolute level of cash headroom that you have available on all bank and credit facilities, and consider drawing down any unused elements of those facilities to give yourself the maximum levels of flexibility and security of cash in your bank.”
He adds that advisers should: “Understand the working capital cycles of your business on a daily, weekly and monthly basis.
“Review the timing of payments for suppliers and consider if or how these could be delayed.
“It is always better to work with your key suppliers proactively, rather than avoid paying them, particularly if they are critical to your business and can easily switch off their service or refuse to deliver.
“Also, review your invoicing processes and debtor collection, and consider how you could fast track cash into the business. Prioritise issuing invoices to customers, and ensure that they have no blockers to prevent payment on time.”
Francis Klonoski, who runs Klonowski and Co, an advice business in Leeds says he “tends not to check” monthly income statements, and that he has endeavoured in recent years to move as many clients as he can away from the percentage model of charging.
He says that while the half-yearly fee income earned by his company may be lower, the overheads within his business, such as travel and accommodation costs to meet clients, have fallen dramatically.
Mr Klonowski runs his business from home so has a lower level of fixed costs than many, and as such it is the variable costs that are more noticeable for his business.
David Thorpe is special projects editor of Financial Adviser and FTAdviser
