Long ReadMar 7 2023

How advisers are battling increasing cost pressures

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How advisers are battling increasing cost pressures
(FT montage/Charlie Bibby)

According to a recent study by Abrdn, 85 per cent of advisers are expecting a rise in overhead costs over the next six months. 

Some 39 per cent believe rising costs could impact their business over the next year, with firms attributing concerns to simultaneously falling revenues due to clients’ invested assets decreasing in value (46 per cent) or because clients were withdrawing more from their investments (44 per cent).

As a result, just 26 per cent are or will be increasing fees charged to clients – 39 per cent for network firms.

Steven Rowe, director at Lucent Financial Planning, says while increasing fees to overcome additional costs is justified and that it is important that an IFA is profitable, raising client fees should be the last option once operating costs have been minimised.

While clients understand what's going on with rising costs, I'm not sure [increasing fees is] something advisers would consider ahead of better efficiencies internally.Wes Wilkes, Iron Market

He adds: “An adviser in financial trouble is more likely to give duff advice if they are focusing on ‘getting the sale’. 

“However, this depends on the fee model: if fixed fees then the above stands; if a percentage of assets, then it’s not playing the game to the rules agreed at outset, which are that the adviser profits when the client profits and shares the pain when values fall.”

Wes Wilkes, chief executive at Iron Market, adds: “My gut instinct is that costs are a function of expenditure, not income. While clients understand what's going on with rising costs, I'm not sure it's something advisers... would consider ahead of better efficiencies internally to reduce costs and improve their offering.”

Reviewing business models

How the cost challenges impacts advisers will depend largely on their client acquisition and retention strategy; for example, working with families on their intergenerational planning, the implementation of technology and overall resourcing of the business. 

These are areas that they can control, unlike the markets and the economy.

And while firms will be reluctant to increase their client fees, especially during a time of challenging investment returns, Richard Phillips, network development director at ValidPath, says there is scope to review the firm's fee income model versus the cost of delivering the service at a client-specific level to identify outliers who are costing money to serve, often for a historical reason.

Phillips adds: “For firms increasing their cost of servicing, this will be a last resort and may be implemented for new clients initially rather than applying to their existing clients, although applying the increase to all clients would be the easiest way to increase their revenues.”

The Abrdn study also found 44 per cent of IFAs have or plan to make changes to their business to manage the impact of increased overhead costs.

Not all advisers will have great relationships with their clients. And, for those firms, raising fees may backfire as it prompts their clients to shop around.Scott Gallacher, Rowley Turton

More than a quarter (29 per cent) have or will relocate offices (43 per cent for networked businesses), while 28 per cent are investing in new platform technology (43 per cent for network businesses).

Scott Gallacher, director at Rowley Turton, says while relocating offices is likely to have little downside for clients, many firms will be tied into a lease, so this is not necessarily a quick fix for their current issues. As for investing in new platform technology, this might be to create efficiency savings. 

He adds: “These efficiency savings could then reduce staffing costs or enable the firm to take on more clients. But again, this isn’t necessarily an easy fix, as changing any technology typically comes with a steep learning curve.

“As with any sector, not all advisers will have great relationships with their clients or provide a great service. And, for those firms, raising fees may backfire as it prompts their clients to shop around for a new adviser.”

At a conference held by ValidPath last year, Phillips says advisers were aware of the headwinds they faced and many already had plans in place.

Phillips adds that firms who are looking to sustain growth through new client acquisition or with longer time horizons are better prepared to address the challenges.

Levy volatility 

Matthew Connell, director of policy and public affairs at the PFS, says the big challenge around operational costs, regulation-wise, is the volatility around costs like the FSCS levy and professional indemnity insurance.

The FCA has set out a target as part of its retail investment strategy to "act to stabilise the FSCS Life Distribution & Investment Intermediation (LDII) and Investment Provision (IP) funding classes by 2025 and target a year-on-year reduction in these classes from 2025 to 2030".

Connell says: “The logic for this is that more effective supervision will reduce the amount of compensation that has to be paid by well-run firms.

In the same way we have a duty of care to our clients, the FCA should be understanding of our financial situation and how we are being impacted.Tim Morris, Russell & Co

"We welcome this target, but we think the government and FCA could go further – by replacing FSCS levies and PI insurance with a levy on assets under management in the UK. This would remove the volatility of fees for advisers, making it easier for them to plan operational costs, without compromising the amount of protection given to consumers.”

Recently, the FCA sent out its latest resilience survey to all relevant firms in its selected portfolios to help it better understand the level of financial resilience firms have. 

Tim Morris, IFA at Russell & Co, says: "While there has been a decoupling between advice fees and clients’ assets, most ongoing fees are charges as a percentage of assets.

"As with many clients, I’ve certainly been tightening the belt buckle. In the same way we have a duty of care to our clients, the FCA should be understanding of our financial situation and how we are being impacted.”

Operational efficiencies 

With the financial advice sector under constant pressure to reduce charges, Phillips says firms can use this as an opportunity to review their processes and as a rationale look for operational efficiencies, which some are already doing.

These range from enhancing their hybrid approach to reviewing their discretionary spending.

Steve Gazard, chief executive at Quilter Financial Planning, says that while advice firms are not directly energy intensive, the past few years has shown why they need to be as efficient and productive as possible to build greater resilience, and key to this is better using technology. 

At Quilter, the network has been helping advisers to look carefully at servicing to see whether they can remain regulatory compliant, save time and bring more value to their clients just by tweaking their processes.

Technology is not necessarily a panacea here as sorting out processes first is essential.Steve Gazard, Quilter Financial Planning

Behavioural experts are also looking at how advisers deal with required documentation and how technology might help. 

Gazard adds: “It’s worth noting that technology is not necessarily a panacea here as sorting out processes first is essential.

“By dissecting the whole process and making lots of small changes we can create huge time savings. It then allows more time for the personalised services and critical activities clients value, as well as allowing business principals more time to develop the future of the business, whether that’s how to take on more clients or training new advisers.”

At ValidPath, the network supports its advisers with regulatory compliance, captive insurance (a form of self insurance), agency, new technology and banking functions. 

"PI cover has been a huge variable for advice firms, with jumps in premiums, and we established our own captive insurer, allowing them to benefit from our scale, longevity and robust internal processes.

“The benefits of captive insurance include greater cost efficiencies, stability, improved claims handling procedures and the ability to cover non-standard or complex investment types.”

Ima Jackson-Obot is deputy features editor of FTAdviser