The financial side effects of the pandemic, including a shell-shocked economy and damaged stock market, are bad news for advice firms’ profitability – and in some cases, their survival.
Many advisers have been through crashes before.
However, according to a paper published in March by the Boston Consulting Group (BCG), on the impact of Covid-19 on the wealth management industry, this time it might really be different.
The report says that high-net-worth investable wealth was 75 per cent higher in 2018 than back in 2007, when the global financial crisis (GFC) started – but warns that wealth managers’ profits are nowhere near pre-GFC levels.
The report also states that the industry’s cost-income ratio in 2018 was 77 per cent − 17 points up from where it was in 2007 − indicating that the average firm is less financially able to deal with the unexpected.
BCG anticipates that profits will take a serious hit if markets do not recover quickly; the report points out that the GFC reduced industry profits by nearly half (44 per cent) between 2007-9.
The conclusion is that firms already on a shaky footing will face a struggle to stay in business.
But the opportunity in this crisis, as BCG suggests, is for firms to use this time to focus on differentiating their business and strengthening client relationships, by providing targeted, personal advice and emotional reassurance.
Focusing on the wellbeing of employees is highlighted too.
Phil Anderson, managing director at Phil Anderson Financial Services agrees that prioritising client needs can help advisers withstand the impact of the pandemic: “Firms that have strong, long-standing client relationships will do OK. We have no major concerns.
“Those that will be hit hardest are those that have a high level of ‘churn’ and are constantly having to look for new business”, he observes.
Keith Churchouse, director and chartered financial planner at Chapters Financial takes a similar view: “Good financial planning has always been about long-term relationships.”
He adds: “Many professional businesses moved to a recurring-income programme some years ago.
"These businesses will see a dent in their profits − but just a dent rather than a catastrophe.
"However, this will be a year that tests the sustainability of sales-driven business models.
"Sales-driven organisations will have a very tough time. There will be casualties.”
Jeannie Boyle, executive director and financial planner at EQ Investors also believes that focusing on clients is key: “Right now, good financial planners are proving the value of their service. We are here to give our clients the reassurance they need at a difficult time.
“That said, there is an inevitable impact on profitability due to stock-market falls reducing the value of assets under management.”
And advisers are dealing with other factors beyond their control, as she explains: “We are still receiving new business enquiries, but it is increasingly difficult to progress these, as providers are reduced to skeleton-staff levels.”
Ms Boyle also agrees with the report that focusing on employee needs is a must: “Values matter to people, especially in an existential crisis like this. We’re not planning to furlough anyone – it’s very important to keep your team together.”