Compliance and regulatory change is a constant challenge faced by advisory firms. These challenges are costly to address and have added significantly to the amount of disclosure that firms have to provide to clients.
One consequence of this is that regulation, while seeking to protect the investor, can lead to confusion. Another is that it’s become more difficult for smaller advisory firms to bear the burden of these additional requirements; forcing some to consider another operating model.
A shrinking universe
Consolidation in the advisory market is a much-discussed trend, especially in the media. The dynamic seems to be one of smaller firms joining up with larger groups in an effort to achieve economies of scale and greater reach.
‘Consolidation is happening, but the numbers aren’t showing it yet... It’s early days.’
- Heather Hopkins
However, the FCA has published data which shows that the drift towards consolidation is perhaps not as established as people seem to think. Heather points out that the market has actually been quite static over the last few years: ‘The data from the FCA is not really showing the shift towards consolidation’. Overall, the number of advisers grew by 1% in the year ending June 2018, and the number of advisory firms fell by less than that.
Where consolidation is occurring, it’s being driven by a desire to retire or a company’s need to achieve greater scale, and thereby more easily assimilate cost pressures.
Another notable trend remarked upon by Heather has been attempts at diversification within advisory firms. Given the pressure on fees and the desire to boost margins, some firms, especially those struggling with profitability, are looking across the industry at more profitable areas.
Advisers as manufacturers
In an effort to capture more value and achieve higher margins, some larger firms are positioning themselves not only as providers of model portfolios but as ‘manufacturers’. Manufacturing entails, for example, advisory firms co-branding with fund providers and offering their own segregated mandates alongside existing third-party funds, at a similar fee.
£112 billion in assets is now managed in this way, growing at an annual rate of 17%. Heather suggests that retail assets in segregated mandates could well double between 2017 and 2020.
But are clients profiting from these trends?
The evidence is sketchy, but there are signs that clients are benefiting from the trend towards ‘upscaling’ in the industry, whereby larger advisory firms achieve economies of scale and find themselves in a position to pass the benefits through to clients via lower fees. However, more traction is needed before a decisive trend is confirmed.
‘Running a financial advice business is costing more money’
- Heather Hopkins
Where do we go from here?
Heather highlights that the costs for advisory firms are rising largely as a result of regulation and compliance. Pressure on fees is forcing players to look at better ways of creating value and achieving margin growth, which in turn is creating a more competitive landscape.
This has led to greater manufacturing as more mid-sized and large advisory firms bring model portfolios in house and run in-house fund ranges. The landscape is changing in the advisory market, and we believe the new terrain should ultimately benefit the client.