The fragmentation of the advice market

Advice offerings are fragmenting. 

When I arrived in the UK in 2004 there was the traditional industry that dominated. It was a sales culture. There was only a very small pocket of financial planners attempting to gain traction with their more client-focused and holistic approach to advice. 

All the old school firms thought they were hippie nut-jobs. 

16 years later, I think it’s fair to say that the financial planning model has made giant strides. 

I don’t know what percentage of the advice marketplace you could safely say do financial planning but it’s a significant chunk and growing all the time. If I count advisers and firms who are in the grey area between the old way and aspiring to move toward the financial planning model, it’s an even heftier group. I’d call that a success.

Show Me The Money

But let’s be honest, financial planning in the last 16 years has really meant retirement planning for the top 5% – 10% of the population. It’s been great for boutique firms that have been gravitating higher and higher up the wealth food chain. 

Now before you start frantically emailing me to say you’ve been secretly working with people below that segment of the population, or you’ve also been serving younger up and coming clients, just take a breath.

I know you have. Lots of advisers have. 

But they’re still a relatively small chunk of most firms’ client numbers, an even smaller portion of their annual revenues, and an infinitesimal percentage of their net profitability, so let’s not get carried away.

Typically these types of clients are better than average earners too, so hardly a solution for the masses. And as the irate man on BBC Question Time eventually discovered, if you earn £80,000 pa you’re not in the top 50% of income earners, you’re actually top 5%. 

I know advisers don’t think of themselves as elitist, but the financial planning model works well for educated people with money.

However, there’s change afoot.

The Advent Of Choice

I’m meeting with more and more advisers and businesses that are moving into new advice areas, trying to serve:

• People who earn less
• People who have less to invest
• Younger people (in their 20s or 30s)
• Accumulation clients (in their 30s or 40s)
• People who only want advice (they’ll DIY the investments and product selection)

To do that, these businesses are also looking at smaller niche markets within those groups. 

There are robo only plays. There are cyborg plays (a mix of human adviser and robo). There are new younger entrants with much lower cost bases than incumbent firms. 

I’m calling it the fragmentation of the advice market and I believe it to be a hugely positive development. 

Rather than all financial planning firms saying they deal with the at-retirement market, we’re seeing offerings that speak to smaller and smaller subsets of people requiring advice. 

They’re trying new approaches to charging, like subscription or membership models. Or blending different charging models to accommodate the specific needs of different clients’ circumstances.

This is a natural part of the maturation of our profession. 

Clients should have a choice about where to get advice. 

There should be firms that specialise in the needs of particular groups of people and they should be “findable” easily in a Google search. 

Rising Costs

Big rises in Professional Indemnity (PI) premiums and FCA levies this year are another part of this industry trend. 

PI rises encouraged Steve Conley at The Academy of Life Planning (and many others) to build advice-only business models. (see Advice Without Compliance – It Exists)

PI rises have dissuaded a huge portion of the advice market from providing advice to clients considering leaving their Defined Benefit (DB) pension scheme. Effectively, this is forcing firms to find new markets to serve.

PI rises are an opportunity for well managed financial planning businesses to further consolidate their place in the market. 

If you can deliver high-quality advice AND build a sustainable business earning the correct margins (i.e. 25% net profit after everyone, including the owners, gets paid a full market rate for their day job), then you are well placed to survive almost any market shocks. You’ve got profits to invest back into the business. For example, to improve the calibre of your staff via better training and recruitment. Or to invest in new technology.

A quality financial planning model also carries dramatically reduced compliance risks. 

Every adverse PI premium increase, every economic recession, and every investment market fall takes out another portion of the adviser population. 

Firms that are not well managed won’t survive. 

And while that’s sad for those affected, fewer advisers and consolidation of many firms into larger but more generic offerings leaves boutique financial planning firms as the place to go for excellent advice. 

In any consolidating marketplace, you need to be large or small. It’s the businesses in the middle that get squeezed. 

Advice offerings are fragmenting. And that’s no bad thing in my opinion.

What do you think?

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Advice offerings are fragmenting. And that’s no bad thing in my opinion.

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