Two sets of stats this year got me thinking about the state of the advice market. I mean, I think about little else, naturally, but more than usual.
The first was some research into the advice gap from OpenMoney and YouGov. (Disclosure: OpenMoney is a client of The Lang Cat and we helped put this report together.) One standout figure was that fewer than one in 10 people had paid for advice of any kind in the last two years.
When asked what would encourage the naysayers to pay for advice (see chart 1), the most popular answers revolved around value, trust, pot size, access and cost.
Up to six million people would be willing to pay for advice if it were cheaper. People aren’t sure that advice will save them money, and they aren’t sure that they can trust advisers.
I can hear you thinking, ‘Aye, Mark, there are lots of things I’d buy if they cost less – a castle, a Bugatti, a 40-year-old bottle of Dalmore. I’m sure we’d all love to charge less, but Susan won’t work for free and the electricity needs paying and we can’t just ignore all those pesky professional indemnity insurance bills.’
A professional service doesn’t come for free. Unfortunately, the sector isn’t so profitable that there is a lot of room for manoeuvre on fees either. Which brings me nicely to the next set of stats that caught my eye: the FCA’s intermediary market data for the full year 2018. The figures tell us that, in aggregate, pre-tax profit as a percentage of turnover has fallen. The bigger a firm is, the less money it makes as a percentage.
For one-man bands, the score is a robust 43 per cent, but for firms in the six-to-50-adviser space it’s down at 19 per cent which isn’t where any professional services business wants to be. And those with over 50 advisers actually made a loss on aggregate, although the figures are skewed by a few super-size firms (hello, St James’s Place) posting some very large losses. Others like AFH, for example, have fared far better with a healthy 50 per cent margin.
Those profitable one-man bands make up less than a 10th of the market and, despite there being only 42 firms in the over-50-advisers category, big firms have about half the market in terms of adviser numbers.
Where does that leave us with the advice gap? The FCA data tells us that revenues are up – £4.42bn from £3.9bn or so in 2017. Although some of it could be down to rising markets, clearly there are still a significant number of people willing to pay the price advice costs now. While there may be six million people waiting to buy advice if the price falls, the traditional advice sector does not have unlimited capacity, which largely dictates the price charged.
Pension freedoms and DB transfers mean that there’s currently no shortage of customers for advisers. And those fewer than 10 per cent of people who have taken advice generally have sizeable pots of money which make the fees more affordable for them and more profitable for the firm.
There’s not much traditional advisers can do to help people earn more. And firms with high staff costs are not about to start charging less
There is definitely lots more we can collectively do as an industry to encourage those willing to take advice by improving trust in the sector, demonstrating its value and improving awareness. But there’s not much traditional advisers can do to help people earn more. And as noted above, firms with high staff costs and onerous regulatory requirements are not about to start charging less.
From the tiny impact robo has had on the sector so far, that doesn’t seem to be the answer to the problem of the advice gap either. But technology must have an important part to play: hybrid solutions, where tech does the initial heavy lifting with human advisers taking over partway into the process.
With Nutmeg and Scalable Capital introducing initial advice offerings, it seems robos may be moving that way. If traditional advisers can also find ways to improve efficiency and reduce staff costs through better use of tech, perhaps we can bridge the advice gap after all and provide regulated advice to everyone that needs it.
Mark Polson is principal at The Lang Cat