FeesJan 18 2019

State of advice industry revealed

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State of advice industry revealed

Unless action is taken by the profession and regulators now the advice industry is facing a mass exodus that will push advice further beyond the reach of the masses.

This is the conclusion of a 50-page report on the health of the advice industry produced by Garry Heath, director general of trade body Libertatum.

The Heath Report 3, published on Tuesday (January 15), revealed following the dramatic shrinking of the industry caused by the Retail Distribution Review there was an uptick in adviser numbers between 2015 and 2017.

Mr Heath's survey, which was sent out in 2017 and completed by 249 advice firms, showed the number of advisers helping clients across the UK increased by 1 per cent between 2015 and 2016 with a net total of 300 fresh faces entering the industry.

However the number of clients seen by the average adviser continues to drop.

The second Heath report, published in March 2015, revealed the Retail Distribution Review resulted in 10 million former clients of impartial financial advisers no longer receiving advice due to 6,000 advisers exiting the industry.

This resulted in the average client/adviser ratio falling from 405 to 195.

The latest Heath report showed the number of clients per adviser has continued to consistently fall.

According to the poll of advice firms, which represent 865 individual advisers, the average number of clients per adviser was 231 in 2010, 208 in 2013, 194 in 2015 and just 180 in 2017.

As a result, Mr Heath calculated another million consumers have lost access to advice in the last couple of years.

Unlike past reports produced by Mr Heath, the 2017 survey also looked to the future of the industry and quizzed advisers on their retirement plans and found 1,650 were ready to retire now.

A similar number stated they would retire every year for the next decade.

The average adviser was found to be in their mid-50s, with almost 45 per cent of advisers polled aged 56-plus, only a quarter were aged less than 45 and just 6 per cent were younger than 35-years-old.

Just half of the advisers polled saw themselves as still being in the industry in more than a decades’ time and one in five stated they wanted to retire in the next five years.

When it comes to exit strategy, 35 per cent of principals said they planned to sell their business, 35 per cent planned to pass on the mantle of leadership to someone being groomed for the role and 3 per cent planned to run the business down.

On how service would be maintained for clients as their advisers retired, most were either developing new adviser talent or investing in technology to plug the gap.

Mr Heath said: "To put this in context, last year we lost 900 advisers. Some to retirement, some to other causes.

"As higher levels of retirement take hold, we will have 1,650 retirees plus maybe another 500 of pre-retirement age. Unless these advisers are replaced by new recruits; the number of consumers accessing advice could be less than one million in 10 years.

"More importantly the cost of regulation will be split among a much smaller number of clients. The current fixed cost of regulation is £72 a year. Fancy explaining to your client that the cost is now £147? You will have to in five years."

The report, which aims to provide an overview of the current availability and future provision of impartial financial advice, proposed the creation of a training academy for administrators, paraplanners and advisers.

Following talks with professional bodies and other industry’s training academies, Mr Heath believes if properly constructed an adviser training organisation could access more than £300m a year to fund this effort from the government’s apprentice scheme.

Keith Richards, chief executive of the Personal Finance Society, said hopefully not everyone would follow through with their plans to retire but agreed more could be done to attract fresh faces to the industry.

He said: "We can't be complacent about the future and have been working on initiatives to attract and train the next generation of financial planners."

Actively servicing

Mr Heath's survey also explored whether advisers were actively servicing their clients.

Overall, an average of 68 clients per adviser, or 238 clients per firm, are no longer being actively serviced by their advice firms.

Seven out of 10 firms had contacted clients to explain their decision to no longer service them.

Just 13 per cent suggested these clients seek an alternative source of advice and 3 per cent had actively approached another company and recommended their services to their former clients.

However Mr Heath said just because companies had opted to no longer actively service their clients did not mean they didn’t have the capacity to help more people who need financial advice.

Seven out of 10 of the firms who have decided to no longer actively service all their clients told Mr Heath they still viewed themselves as having the capacity to increase the number of people they offered advice to.

Mr Heath said this was a clear indication that firms were rotating their client banks to recruit more economically viable clients and ditching those who were not able to afford their services.

Profitable

But it wasn’t all doom and gloom with Mr Heath’s third report on the state of the advice industry revealing despite the continuing damage done to adviser numbers by regulation that intermediary businesses are more profitable than ever.

A third of firms polled revealed they were earning more than £250,000 a year in fees for ongoing service.

It was not uncommon for firms to be earning as much – if not more – from fees for ongoing service as from provision of advice.

However many firms revealed the regulator’s capital adequacy requirements were holding them back from further developing their business.

The largest firms revealed they were having to hold in excess of £250,000 while one-man band IFAs were holding between £10,000 and £50,000 a firm.

Roughly, Mr Heath calculated this equated to between 10 per cent and 25 per cent of advice fees.

He said: "As an industry we need to sort out capital adequacy, no other profession is judged by this measure.

"It restricts the development capital available to firms and prevents restructuring. It must go."