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20.07.21

Tension in the financial advice sector - The benefits of scale and investment in this rapidly changing market

James Buckhalter | Investment Team

News

There is a peculiar tension in the financial advice market. On one hand, more people need access to affordable financial advice; on the other there is the ever-rising burden of compliance for firms providing advice to ensure they do so responsibly and with full accountability. For many smaller firms, the systems and processes needed to meet these requirements, coupled with the time and costs involved, are significant. So, what are some of the considerations for IFA’s seeking to continue to develop their business, and best meet their clients’ needs against this backdrop?

Regulatory drivers

Of course, there is no question of the need or benefits of robust compliance. Improving outcomes, building trust, and reassuring consumers can only be a good thing. However, compliance can make up between 5% and 10% of operating costs and for smaller firms who have to outsource (and therefore pay a margin) or employ an extra FTE focused on compliance this can be significantly higher.

The FCA has, rightly, increased its focus on:

  • Unsuitable advice (especially around pension transfers)
  • Pension and investment scams
  • Excessive fees or charges

In addition, the regulator is driving providers to broaden access, and for the advice given to be consistently appropriate, regardless of the level of financial sophistication of the end client.

What are some of the considerations for IFAs seeking to continue to develop their business and best meet their clients’ needs?

James Buckhalter, Investment Team

As a result of pressure from the FCA between 2015-2020, for example, the number of firms offering pension transfers fell 46% from 2,426 to 1,310.¹ The Retail Distribution Review (RDR) of 2012 and the Pensions freedoms reforms, entail much greater scrutiny for firms providing advice, especially around Defined Benefit or ‘DB’ pension transfers. This dynamic ordinarily drives consolidation in any market and – one suspects – this is exactly what the FCA wants here: fewer businesses to regulate and higher-quality advice.

The complexities for business owners

As an experienced investor in financial services businesses, we have witnessed a tension borne out in the many conversations we have had in the market: for many it is less the burden of being compliant (because most are) but rather proving their compliance through extensive documentation and evidence. Despite continuing to win new business throughout the pandemic, for some businesses these inflows are barely keeping pace with the rising tide of regulatory and compliance pressure. Even if firms can afford it, some business owners are tiring of the struggle to maintain perfect records while continuing to serve their clients.

Investing in growth underpinned by quality

Skerritts is a very successful Brighton-based IFA led by founder Richard Skerritt and established thirty years ago from his home office. The business had made eight acquisitions over the years and the management team were keen to further scale Skerritts in the UK whilst continuing to deliver the same level of service and care they are recognised for; they wanted an investor that could help them achieve their ambitions. Sovereign invested in the business earlier in 2021 to help it further develop both organically and through acquisition.

Enhanced operational efficiency, whether through dedicated support teams or economies of scale, is one of the benefits of belonging to a larger group and something that we champion. As a well-invested business, Skerritts has a dedicated compliance team, for example, that enables the advisers to focus fully on what they do best: working with their clients to support their needs and having the time to generate new business.

If you would like to discuss the IFA market with us in confidence and explore how a partnership with Skerritts may benefit you and your business, please get in touch with James Buckhalter or Peter Eckersley.

¹ https://www.ftadviser.com/fca/2021/05/07/fca-to-continue-crackdown-on-db-transfers-into-2022/

FURTHER INFORMATION

 

Julie Sieger, +44 (0)20 7340 8800 or email: juliesieger@sovereigncapital.co.uk