Companies with 50 or more advisers grew to 42 companies from 22 in the same time period. This can be because, in contrast to insurers and fund managers, it is hard to realise scale benefits within IFA practices.
For example, new client acquisition based on personal recommendations cannot be scaled up for more advisers.
Furthermore, the value of financial advice is underpinned by advisers’ client focus, which can be lost as businesses grow.
FCA figures demonstrate the profitability of smaller companies, with 97 per cent of concerns with between one and five advisers making a profit compared with 73 per cent of those with more than 50 advisers.
The figures show these smaller companies are also making more profit than their larger counterparts, with average profit as a percentage of revenue for companies with one adviser at 43 per cent, compared with minus 0.8 per cent for practices with more than 50 advisers (see graph).
The data shows a lively marketplace where small advice companies can happily coexist with larger ones. We are not the only people who think this way.
Benefits of being smaller
During a recent conversation with SimplyBiz’s joint chief executive, Neil Stevens, he was keen to sing the praises of smaller companies.
“We have long shouted about the benefits of small practices; they work and are very profitable,” he said.
“With the right support, smaller firms can have access to all the processes, tools and governance they need to run just as efficiently as bigger companies. Small practices have a very bright future ahead of them.”
In conclusion, it is critical we have a fact-based discussion around consolidation and the future of the IFA market.
It would be naïve to write off the power of the small IFA company on the basis of ageing practice owners or growing compliance requirements.
Smaller companies have much to offer, and with the right support there’s no reason why these companies should not thrive.
This is borne out in the FCA’s data on the retail intermediary market, which described small companies as remaining “a significant part of the intermediary sector” with nearly nine in 10 financial adviser and mortgage broker businesses having five or fewer adviser staff.
From our perspective, rather than focusing on IFA consolidation we should celebrate the diversity and dynamic nature of our industry. There is a role for large and small companies, for buyouts and new adviser start-ups. Different business models help create competition and choice, which is ultimately good for end customers.
Tom Dunbar is distribution director at Royal London