The retail distribution review introduced in 2012 was widely credited as a transformational step-change that reshaped the advice industry.
If in the early days it resulted in some advisers leaving the industry, the bare numbers do not show it.
The number of advisers grew to 36,700 in 2021 from 35,000 in 2012, based on the Financial Conduct Authority's Retail Mediation Activities Return data.
However, that modest increase masks a great deal of change under the surface.
We have seen significant changes in professionalism and in the shape of the industry at firm level, most notably the rise of adviser networks and consolidators.
With the consumer duty rightly being seen as RDR 2.0 in terms of its importance, what impact will it have on smaller firms given the ever-increasing compliance burden? Are advisers planning to leave the industry?
The industry’s accelerated search for scale could be a sensible response to higher regulatory burdens and a positive development for consumers in the advice gap.Our Embark Investor Confidence Barometer survey asked these questions and it paints a picture of a search for scale against a backdrop of rising costs and the impact of regulatory compliance: 72 per cent of advisers say that joining a network is now inevitable for small firms to protect against rising costs and regulations.
Most advisers (70 per cent) also say large firms should be looking to grow via acquisitions of smaller firms.
Here we saw the strongest agreement (92 per cent) in the £400mn-500mn assets under administration range – the very firms that might be doing the buying.
The need for scale is also having an impact on business strategy. We see a picture of growth by any means, with a notable part of the industry prepared to sell their business as advisers retire.
Asked about their business plans for the next 10 years, the most popular strategy among advisers surveyed was to grow organically (42 per cent), followed closely by growth by acquisition (37 per cent).
On the other hand, around one in five adviser firms are prepared to sell, with trade sales and selling to a network being the leading options.
Of those advisers who are interested in selling, the need for scale comes out top again; the most popular reason (43 per cent) was, ‘We’re too small and we want the benefits of being part of a large firm’. The second, but related, reason was, ‘The rising costs of doing business and margin pressure’.
This ‘achieve growth or sell’ trend describes and also cements the rise of the large networks, which can take advantage of the economies of scale provided by larger AUAs, greater spending power and centralised costs.
Advisers are also drawn by the opportunity to access exclusive centralised investment propositions, with model portfolios that can be tailored to clients alongside packaged risk profiling and cash flow tools.
The shared costs and resources that a network provides means that advisers who join may be able to target a greater amount of clients under the consumer duty’s value-for-money focus than they could otherwise do as a standalone small firm.
In this way, the industry’s accelerated search for scale could be a sensible response to higher regulatory burdens and a positive development for consumers in the advice gap.
Certainly, the cost of regulatory compliance is making scale and delivering good client outcomes increasingly interlinked.
RDR catalysed that process and the consumer duty accelerates it. Combined with tighter financial conditions and falling asset values, it could trigger a further wave of mergers and acquisitions in the financial planning industry as vulnerable firms are swallowed up opportunistically by the strong.
We are likely to see further horizontal integration of smaller advice firms into networks.
Vertical integrations have also become more prominent, as large advisers and networks explore white-labelling platform services and acting directly as a platform service provider.
Of course, this will radically change the risk profile of adviser firms adding new regulatory and capital requirements.
White-labelling of platform technology and the centralised investment proposition can be a smart solution for medium-to-large, fast-growing adviser firms since it provides access to robust infrastructure and capability at a fraction of the time, cost and risk associated with developing and running their own platform kit and investment products from the ground up.
Jonathan Sandell is group head of propositions at Embark Group
