Regulation 

Survival of the biggest as tie-ups take effect

“The privately owned predators will be keen to float or sell to a giant before regulation and complaints make their business model untenable. And the next change of chief executive at the giants will, no doubt, ditch the move back to vertical integration, which means we’ll be back to an industry dominated by the small IFAs and St James’s Place.”

At everyone’s expense

For small outfits, the decision on whether to sell up or retain independence is not so straightforward. Regulatory costs, for one, can mean that running a small advice business proves an expensive venture.

The FCA is well aware of this, but must weigh its concerns on this front against other priorities. On January 17, the regulator announced it would be speaking to smaller businesses, including advisers, specifically to ensure its “cost-benefit analyses and judgements of proportionality take into consideration smaller firms’ circumstances”.

Those who welcomed this news would have been conscious that the regulator’s annual sector views document, published a week earlier, saw it criticise what it called “expensive” advice costs.

The cost of advice has been under scrutiny ever since the RDR was introduced in 2013, with the resulting advice gap proving to be a puzzle that appears no closer to being solved. Offering advice at a lower cost remains a serious challenge, and the problem may be getting worse.

A peek at profit trends helps reveal why. According to the Pimfa report, advice companies’ profit as a percentage of revenue dropped from 25.4 per cent in 2013 to 15.4 per cent just three years later. A 15.6 per cent figure recorded in 2017 suggests the situation is starting to level off, but as Chart 2 shows, this remains far below both levels recorded at the time of the RDR. This means that scale is becoming a vital factor. 

“One-man band companies will find it difficult to survive from a cost perspective; to maintain levels of service, clients’ costs would need to increase,” says Dhawal Chandan, director at Just Financial Group.

From an investment perspective, increasing scale can also help secure better deals from asset managers for their funds, the savings from which can then be passed directly on to the client. 

Mr Dyer adds: “Mifid II legislation is an administrative headache. For advisers using simplified investment propositions, the administrative costs of rebalancing [client portfolios] is substantial.”

He also points to additional issues for small companies. He says the Financial Services Compensation Scheme levy, recently set at £175m for the coming year, is making it tougher for firms to obtain professional indemnity insurance cover.

Recent deals

Quilter’s acquisition of Lighthouse is anticipated to complete in the second quarter of this year, and will see 400 advisers join Quilter’s Intrinsic network. This deal represented the fourth acquisition the company had made this year alone, adding to the purchases of Freedom Financial Planning, Stephen Spires Financial Consultants, and Charles Derby.