Financial Adviser article on the future of independent financial advice
A fantastic article from Myron Jobson at Financial Adviser on the future of independence, published on 30th June 2016.
The end of independence?
The future of the ‘independent’ status has been cast into doubt following the advent of advisers switching to the restricted model in the wake of the Retail Distribution Review (RDR).
Bristol-based Hargreaves Lansdown, and London-based Towry and Brewin Dolphin are examples of some of the UK’s largest financial advice firms that have opted to ditch their independent status following the implementation of the review.
According to the latest edition of the Association of Professional Financial Advisers’ (Apfa) annual market study, which used figures provided by the Financial Conduct Authority (FCA) for firms classified as financial advisers, 9 per cent of income in the financial advice industry in 2013 came from restricted models compared to 2014 when it rose to 20 per cent.
However, the figure did recede slightly to 18 per cent in 2015.
The move to the restricted model has gathered pace in recent times, with more news of IFA businesses being bought out by larger rivals – often with the backing of a life assurer parent.
Life companies have cherry-picked high-calibre and renowned businesses from a dwindling pool of independent firms, and have absorbed them into their restricted and vertically integrated model to bolster their distribution channels. Standard Life is one of these firms. The life assurer strengthened its advisory business 1825 – which was founded last year with the purchase of Pearson Jones from Skipton – with the acquisition of several high-profile advisory businesses, including Munro Partnership and Baigrie Davies.
However, the pick of the bunch was the purchase of Almary Green, an award-winning Norwich-based IFA firm which boasts around £400m assets under advice, 1,900 clients serviced by 22 advisers and paraplanners, and has Carl Lamb at the helm.
Speaking to Financial Adviser at the time of the deal, Mr Lamb, said the decision to stray away from independence was not taken lightly, adding that the model had weakened amid pressures on operational costs and access to advice.
The cost pressures of operating a financial advisory firm show no signs of abating.
Financial services firms will be forced to pay £469.8m of the total regulatory costs in 2016/17 – a 7.2 per cent rise on last year’s figure of £438m.
Futhermore, in April this year, the Financial Services Compensation Scheme (FSCS) announced that it will levy £337m in this financial year – £18m more than the charge in 2015/16.
In the Apfa report, Chris Hannant, the trade body’s director general, pointed the finger at the FSCS levy for a 10 per cent fall in pre-tax profits for advice firms from £931m in 2014 to £835m in 2015.
The RDR has also seen IFAs signing up to networks to allay the heightened cost pressure and regulatory burden, coupled with the fact that many adviser businesses have not made a smooth transition to a fee-based charging structure following a ban on commission payments on investment and retail products.
However, in the fallout from RDR, a number of these networks, including Personal Touch, have switched to the restricted model.
For David Carrington, Personal Touch’s sales and marketing director, costs are not the only driving factor behind the flight to restricted models.
He said: “It is like asking whether a Mini is cheaper than a Rolls-Royce. It is, but there is more to the equation than price. Most advisers have made the switch for other factors, but with client welfare at the forefront.”
It has been reported that a number of staff who joined Standard Life’s advice arm with Pearson Jones when it was acquired last year have since left the firm.
In late May, Steve Murray, chief executive of 1825, told Financial Adviser that nothing out of the ordinary was going on, adding that the movement of staff is expected in any organisation.
Carl Melvin, director of Renfrewshire-based IFA firm Affluent Financial Planning, claimed that retirement is another key factor.
He said: “Advisers are realising that retirement is not a million miles away, and are making an exit plan. I don’t think they pay too much attention to the model adopted by the firm that will be acquiring their business.
“I think one of the key questions is, does the independence status actually matter? It does to IFAs, but clients are so confused by the meaning of independent, restricted, tied, and multi-tied.
“Clients invest in the adviser, not the business model. Therefore, I do not envisage clients of Almary Green leaving the company in droves, because they are likely to have already established a trusting relationship with their adviser. I can’t imagine the level of service dipping.”
A recent survey conducted by mergers and acquisitions specialists Harrison Spence involving 125 IFAs found one in five expected a move to restricted status this year.
Admittedly, this is offset by the 65 per cent who do not envisage themselves straying away from the independent status in the future, but this still does not dilute the fact that many have jumped ship.
Graeme Mitchell, managing director at Galashiels-based Lowland Financial, said he reluctantly moved to the restricted status after taking advice from compliance consultants, and following a conversation with a FCA representative on the watchdog’s definition of independence at an industry event.
He added: “I am sure the 65 per cent genuinely want to maintain their independent status, but whether or not they do depends on how the FCA enforces their rules on independence. I would say that it is nigh on impossible for a one-man band to operate an independent model, but people are not going to change unless they are forced to do so.”
The advent of champions of the independent advice model apparently ditching their principles to go down the restricted route has prompted fears of it sounding the death knell for the independence model.
In a document published by Apfa, Malcolm Kerr, senior adviser at Ernst & Young, predicts there will be 15,000 investment advisers by 2020 – half of which will be restricted and associated with vertically integrated firms and their brands.
In addition, banks have begun to re-immerse themselves into the investment advice arena just a few years after abandoning the sector altogether following a period of failing profits and a string of high-profile fines and regulatory upheaval.
It is understood that many of these institutions will only offer advice on their own products.
However, it is not all doom and gloom for advisers wedded to independent status. For Mr Melvin, the return of the banks does not represent a threat but rather a boon, to the plethora of people who have fallen into the advice gap.
What is more, Brian Spence, managing partner at Harrison Spence, claims that investment in the sector is viewed as a lucrative proposition to outside investors because of the pent-up demand for financial advice – intensified by a fall in adviser numbers post-RDR.
He said that the firm is currently advising a number of companies, including an unnamed South African company with no ties to the industry, but which relishes the opportunity to inject capital into smaller IFA firms.
He added: “The problem for many IFA business owners is that the option of being bought out by a younger adviser who works in the company is not always available and a lot of the firms that are buying operate a restricted model.”
However, for many, independent advice will not disappear from the market altogether, but will become the preserve of the well-off.
Mr Melvin agreed, adding that many advisers cling onto the independence status because of the unbiased, free-from-third-party connotations of the term.
This is not to say that clients will be worse off with restricted advice. Restricted advisers must achieve the same qualifications and meet the same suitability standards as their independent counterparts, therefore, the argument goes, the quality of advice should not differ between the two models – in theory.
Myron Jobson, Financial Adviser, 30.06.16