Small advice firms will still have a place in the industry despite rising regulatory costs and dwindling revenues, commentators have predicted.
Recent weeks have seen advisers warn they will soon be forced to increase their fees to balance the books in the face of ever-increasing regulatory costs and professional indemnity insurance premiums.
Jacqueline Lockie, head of financial planning at the Chartered Institute for Securities & Investment, said while advisers may need to revise business plans, office costs and client fees, small companies still had a place in the market.
Ms Lockie said: “If we look back, I remember in 1988 commentators said that the [Financial Services and Markets Act] would mean the end of small financial advice businesses.
“The same was said during [the Retail Distribution Review] and 2008-09 financial crash. But the small business sector has not disappeared.”
It comes as regulatory bills landing on adviser doorsteps rocket this year, driven by a rising Financial Services Compensation Scheme levy, and the latest data from the Financial Conduct Authority revealed profits at advice companies of all sizes dwindled in 2019.
Figures published by the regulator last week also confirmed it was the smallest advice companies bearing the financial brunt of what many have increasingly warned is a hardening PII market.
It coincides with the aftermath of the coronavirus crisis, which some have predicted could trigger a greater exodus from the advice profession than that seen in the wake of the RDR.
Funding the lifeboat
Ms Lockie said the funding of the FSCS was an “ongoing concern” for the industry, with companies having no control over how much the bill increases and that those who “continue in business each year [are] paying to compensate clients of those who do not”.
However, she added: “But as a relative proportion of turnover, the FSCS levy should not be significant.
“In the same way that small financial planning businesses will be budgeting for office premises, the FSCS levy will also need to be factored into the planning of the cash flow of the business.”
Shelley McCarthy, managing director at Informed Choice, said her company’s regulatory bill was more than 61 per cent higher this year, but agreed the costs had to be factored into business plans.
Ms McCarthy said: “While I think the regulatory bills are unfair – with the polluter often not paying and phoenixing continuing – and the increase year-on-year absurdly high and difficult to budget for, I do not feel that this adds to the ‘perfect storm’ for most smaller companies.
“This may depend on the percentage of income derived from new business or as a result of servicing ongoing clients – a more established business is likely to have a higher level of known and ongoing income.
“It will also depend on whether businesses are ‘practising what they preach’ in terms of having funds set aside for an emergency, such as an unforeseen increase in costs, and not stripping all of the profits from the business.”