A third of IFAs expect their business turnover to drop this year as a result of higher expenses, volatile markets and lower fees.
Some 31 per cent of advisers expect a reduction in turnover in 2023, according to the Lang Cat’s state of the nation report, released today (January 19).
This lack of confidence is not due to an expectation that there will be an exodus of clients, rather that the impact of high inflation and volatile markets will raise costs and impact profit.
Source: Lang Cat
Indeed, 94 per cent of the 605 advice firms surveyed for the report said they are consistently adding new clients to their books.
Instead, the anticipated drop in turnover is attributed to higher business costs due to inflation.
Higher operating costs
Nearly nine in 10 IFAs expect their operating costs specifically to rise in the next six months, according to separate research from Abrdn.
Of the 302 UK financial advisers surveyed by Censuswide on behalf of Abrdn, 39 per cent said they were concerned that cost increases could threaten their businesses in 2023.
Jonny Black, strategic director at Abrdn said firms must walk a fine line when managing these pressures.
“There is only so much they can do to reduce operational costs without affecting service levels and their operational effectiveness.
“Management teams will also be wary of turning to increased fees.”
Abrdn’s research shows two in five firms have made, or plan to make changes to their business to manage the impact of increased overhead costs.
These include moving offices (29 per cent), investing in new platform technology (28 per cent), or hiking fees (26 per cent).
One reason for the anticipated drop in turnover is the relatively poor performance of portfolios in 2022.
This will have impacted advice firms whose payment models are based on a percentage of assets under management, as the value of those assets will have dropped in the year.
The traditional asset allocation model, 60 per cent equities and 40 per cent bonds, lost 17 per cent last year according to Blackrock.
This was a step-change from the usual performance of the strategy, which saw average returns of around 7 per cent between 1999 and 2022.
For Scott Draycon, a senior financial adviser at Lyndhurst Financial Management, the flow of new business in 2022 has more than made up for the market volatility and higher costs.
The majority of new clients approach Lyndhurst after a big life event, such as a divorce, death in the family or job loss, Draycon said, and most are referred by other clients.
“I think because of the economic downturn, what is going on in the political world, and of course coming out of the pandemic, people are more comfortable talking about [money] and asking someone to pass on the name of a financial adviser.”