The impact of the pandemic on advisers' profitability

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.

Adviser experience

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.” 

While a strategic business model may offer more protection than a short-term, sales-driven approach, some advisers will be hurt by the pandemic simply due to the nature of the advice they provide, says Scott Gallacher, director and financial planner at Rowley Turton: “Mortgage and protection advisers will be hit hard, because most of their work is new business.

"And the mortgage and protection market is being hit by the ‘closed-door’ nature of the pandemic – people are just not moving house.”

Other factors will be important too, in assessing the impact of the pandemic on profitability, as Mr. Gallacher adds: “For those advice firms which are client-service driven, coronavirus is not such an issue.

“But it will be a testing time for firms that are not long established, have spent the money coming in or have invested in an aggressive growth strategy. Also, some newer advisers who have never seen a crash before.”

He concludes: “If the pandemic turns out to be a blip, people will trade their way out. If it is the new norm for a few years, it will be a different picture.”

Swings and roundabouts  

Despite the negative impact of the pandemic on profitability, there are also potential sources of new business, as Mr. Anderson explains: “We had a particularly good month in March, but expect the next few months will be down, as people have other things on their minds.

“However, there may be an increase in enquiries from people looking for retirement-planning advice – for instance if their work circumstances have changed.”

Mr. Churchouse also anticipates that expert financial advice will be particularly in demand as a result of the pandemic, as he says: “People are unsettled and will be looking to make changes. I expect a baby and divorce boom, as people are trapped together and some people manage that well, whereas others don’t.” 

Advisers are noticing other potential new revenue streams emerging, too, from people who might previously have overlooked the value of expert advice: “We are receiving lots of calls from DIY investors who realise that things could have gone better, Ms. Boyle reports.

“And people who have been managing their own pensions may be realising that they have been taking more risks than necessary and now need professional advice,” she adds.