CoronavirusMay 7 2020

New advisers to bear the brunt of Covid-19’s bite

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New advisers to bear the brunt of Covid-19’s bite

Experienced advisers said attention has turned to the drop in new business that has knocked initial fees and one-off payments.

Businesses at an earlier stage of their lifespans are likely to rely more on initial revenue, which is set to be worst affected by the market and financial uncertainty caused by the coronavirus crisis.

Ruth Whitehead, of Ruth Whitehead Associates, said: “I’m sure I am not the only IFA firm deeply grateful for ongoing income, however depleted, in the current circumstances.

“I know so many firms almost entirely dependent on a constant flow of new instructions who are deeply worried about the future.”

While March’s severe market drops raised concerns that ongoing fees could be chipped away by lower assets under management, the subsequent recovery has lessened those worries for now.

Instead, advisers are more concerned about the longevity of their businesses – and while established companies have been able to maintain their clients’ trust, young advisers without a track record will lack the financial resources to overcome any drop in revenue.

Martin Bamford, head of client education at Informed Choice, agreed. He said: “The headlines showing massive drops in global equity markets are not the experience of the majority of clients invested in well-diversified portfolios.

“Looking over the past year, the maximum loss in our client portfolios is around 5 per cent, and less than that on average, so our recurring revenue will hold steady for now.”

Over the two months to May 1, the Investment Association Mixed Investment 20-60 per cent Shares Sector – which represents a typical mixed portfolio held by most advised clients – is only down 5.5 per cent, suggesting advisers with an income primarily from ongoing fees may not be feeling much of a pinch.

 

A recent poll of advisers by Rowley Turton found that Covid-19, and the resultant lockdown measures and social distancing rules, had put the brakes on new business.

Some 62 per cent of respondents had seen new business enquiries fall by 51 to 75 per cent over the past month, with 12 per cent reporting enquiries had fallen more than 75 per cent.

Scott Gallacher, director at Rowley Turton, said: “An adviser with limited funds under management and mainly working with new clients could see their income fall by 50 per cent if new business dries up, and this is obviously not sustainable long term.

“However an older, established adviser perhaps nearing retirement does not look for new clients. Instead, they prefer to look after their existing clients. They potentially see a 5 per cent fall in income.”

However, relative newcomer Sarah Drakard, IFA at Cruze Financial Services, said the market drops had not affected her income in part because of the other financial planning services she provided.

She said: “I see ongoing fees almost as a bonus. The bulk of my income comes from initial fees. That [may] change when I’m in a different stage of my career later on.

“People are not thinking about investing right now. I haven’t seen any new financial advice clients since before the crisis started. If I didn’t have wills and protection, I would be pretty bad right now.”

Reliance on fees

Financial Conduct Authority data for 2018 – the latest available – showed that for companies advising on retail investments, 80 per cent of revenue came from fees and charges. An extra 17 per cent came from commission, while just 3 per cent came from other sources.

The FCA data also showed that on average, 65 per cent of this fee revenue came from ongoing fees, while 35 per cent came from initial business or one-off fees.

Philip Milton, chartered wealth manager at Philip J Milton & Company, said shrinking transaction numbers for new advisers could be bad news for the advice market.

He said: “In terms of new advisers entering the market, it poses a threat to the provision of financial advisory work.”

The crisis is set against a backdrop of falling IFA numbers. A recent freedom of information request from Financial Adviser showed that IFA numbers fell for the first time since the Retail Distribution Review last year, while restricted numbers have continued to rise.

Keith Richards, chief executive of the Personal Finance Society, agreed there was a threat, but was optimistic about the future of the advice market.

He said: “While there is a risk that some advisers, or indeed trainees, may exit the market in the hardest-hit firms, it is likely that many will return once demand and financial stability returns.

“In the long run, this crisis underlines the need for financial resilience and planning more broadly, and therefore both the need and demand for professional financial advice is set to grow.”

imogen.tew@ft.com

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