There are many different strategies, from sole practitioners to large nationals and networks and everything in between. The industry is changing though and as with all business it is important to be clear on your strategy and not to get caught in the middle.
Almost 20 years ago, when we started our business, the industry was fragmented into a myriad of networks and smaller firms following the break-up of the large life company and banking salesforces in the 1990s and early 2000s. Commission was the economic currency of the day and the big network ‘commission clubs’ dominated.
With the Retail Distribution Review, the industry had to professionalise. Firms small and large now run proper P&Ls so that wealth advice now operates like any other industry, with revenues (ideally recurring), costs, profits and productivity the drivers of company success.
Both large and small firms have their merits... The difficulty lies in getting from one place to the other.As the industry and its business model has professionalised, so interest from external investors has grown.
Institutional investors and, in some case, public markets can see the value wealth firms can add for their clients and the recurring revenues that stem from this – both through adviser charging and, in the vertically integrated model, asset management charges.
In a model where the client is looked after, the assets and the clients are retained, so that everybody builds value – the client, the adviser, asset manager and ultimately the firm.
All firms great and small
While it has not been an easy journey, as more firms have shown how this can be done successfully, the pace of consolidation has grown.
The Financial Conduct Authority’s latest retail mediation activities report showed that in 2021, the number of firms with more than 50 advisers rose by 17 per cent, while the number with five or fewer fell by 4 per cent.
Our own client research shows this trend clearly too, with 38 per cent of firms with between two and five advisers, 77 per cent of those with six to 49 advisers and 90 per cent of those with 50 plus increasing adviser headcount over the last three years.
Both large and small firms have their merits. On the one hand, larger firms have the potential to benefit from economies of scale and can use those economies to create more value for the client and, over time, the firm itself.
So many firms get stuck in the middle, with all the costs of a large firm and few of the benefits.Institutional money in the space has brought increased discipline around propositional consistency and efficiency of process and helped to build some great companies.
On the other hand, being a local or regional firm with deep roots in your community and client base and a strong sense of purpose is a brilliantly defendable and sustainable business in an industry that has relationships at its heart – and one in which the technology you need for your financial planning, back office and platform administration can be bought off the shelf.
The difficulty lies in getting from one place to the other. To make the leap, you need to invest in the overheads: the compliance overhead, the process overhead.
You need management with the skills and experience to manage not just dozens but hundreds or thousands of people. You need systems that will work across not hundreds or thousands of clients but tens or hundreds of thousands.
You not only need to make these investments, but to make them work; to have your advisers, paraplanners, administrators and managers successfully adopt them as if they were happily staying in a hotel, not involuntarily being forced to remain in a prison.
That is why so many firms get stuck in the middle, with all the costs of a large firm and few of the benefits.
Getting it right first time
Things look even more challenging in the world of the consumer duty, in which firms need to put client outcomes front and centre and ensure that value is delivered to each.
Older consolidation models where firms were perhaps bought for their revenue streams, with less attention paid to consistency of proposition, will be much more challenging.
Instead, you have to do what the Japanese car companies did, and what any well-run manufacturer does these days, and get your product right first time so that you know it will add value in the way you intended each time, every time.
To do that, you need technology to lighten the load; to build your proposition into your planning technology, independent or restricted; and to embrace a hybrid approach to digital in your client relationships, KYC process, planning and reporting.
Where firms considering selling to a larger group have so much choice, you need to be easy to work for.As I have written before, Prod target markets offer a powerful framework here to help firms of all sizes deliver good client outcomes as well as the needed efficiencies.
You need your financial planning systems and processes to be as integrated and streamlined as possible with your back office so that as you add scale you can manage, monitor and measure your proposition, how it is being delivered and the outcomes it generates.
When you add a new adviser or firm, you need them to follow your processes and proposition – and that is where my hotel analogy comes in. Where firms considering selling to a larger group have so much choice, you need to be easy to work for, with a proposition that is easy to sell and easy to service.
Smaller firms achieve this often through the passion and commitment of the founder(s) or principal(s), and as a result can deliver great service to their clients profitably.
Scaling isn’t easy; it requires long-term commitment and expertise as well as capital. But more and more firms are succeeding. The challenge is to be clear on your model and not to get caught in the middle.
Ben Goss is chief executive of Dynamic Planner
