The financial adviser market in the UK has been extremely fragmented historically and rising costs of regulation and lack of internal succession plans has led to an increase in the levels of consolidation activity in this sector, writes Pranav Nadkarni, director of advisory consulting at Evelyn Partners.
Despite this trend, there is a still a large proportion of small-and-medium sized, regional, adviser-owned firms in the UK.
While there are benefits to firms owned by advisers in terms of the choice available to consumers, these are uncertain times and with rising inflation, volatile markets, a challenging labour market and increasing costs of regulatory compliance, the smaller financial advisers could be heading into a perfect storm.
Costs
Irrespective of the size of the financial advice firm, one of the essentials is to operate a regulated business.
There has been a steady increase in the costs of regulatory compliance for financial advisers over the last few years – which includes the Financial Services Compensation Services (FSCS) levy and professional indemnity (PI) premiums, to account for the rising cases of mis-advice leading to higher customer claims. While these costs may be unavoidable, they do adversely affect the well-run advisers compared to the poorly run ones.
Heightened regulatory focus from the Financial Conduct Authority (FCA), such as mis-advised DB pension transfers, has led to both immediate risk to revenues for some financial advisers and increasing client retention risk.
The costs associated with such investigation add to financial pressure in already trying times. The ongoing inflationary environment and the volatility in financial markets is expected to weigh in on financial adviser profitability.
Strategic focus
Apart from the current economic challenges, there have been several structural changes that have been brewing for some time, impacting the financial advice market – this includes a rise in robo-advisers and fintech-led DIY investing targeted at younger demographic.
We are starting to see the emergence of new hybrid operating models that combine digital tools with the ability to consult an adviser through virtual meetings.
In such volatile times, financial advisers should get a grip of the key risks facing the business and review the impact of these risks on their cash position in the short-term.
Fundamentally, financial advisers should re-evaluate their strategic focus – do they want to stay independently-owned or are they open to sale. Independence could be expensive, especially in the current macro-economic environment. Businesses should regularly review their short-term cashflow forecasts and stress-test these to account for the various risks facing the business.
While there may still be opportunities for exit via sale to consolidator platforms or networks, there is a risk that rising interest rates could potentially slow down the growth in financial adviser consolidation, especially in private equity-backed deals that require debt funding to co-finance these acquisitions.
Financial advisers may consider joining a network group that can preserve their independence, while having centralised back-office support functions, in-house PI insurance cover and technology infrastructure. Financial advisers looking to buy other smaller businesses should place greater importance on employee and client retention through effective communication and incentive plans (e.g. deferred earn-outs).
Insolvency advice
Financial advisers that are already in a distressed situation should evaluate formal restructuring tools (eg such as Company Voluntary Arrangements (CVAs) that can potentially lead to positive outcomes for all stakeholders.
It is important to take insolvency advice and have an open and proactive discussion with the regulators in such scenarios as soon as possible.
This article was written for International Adviser by Pranav Nadkarni, director of advisory consulting at Evelyn Partners.
