Almost all of UK financial adviser firms (94%) reported making a profit last year, although total pre-tax profits are down to £808m from £872m in 2018, according to research published by The Financial Conduct Authority (FCA)
The UK regulator has published findings from its latest consultation into the UK retail intermediary market in 2019, pointing to the importance of small firms, a decrease in investment advice revenues and a continued reliance on commission for mortgage and insurance brokers. For retail investment business, commission still accounts for 16% of revenue while fees/charges accounted for 82%.
The FCA consultation found that:
- • Revenue earned by intermediary firms increased in 2019 compared to 2018. Revenue earned by mortgage, retail investment and non-investment insurance firms increased by 8.5%, 0.7% and 1% respectively in 2019. These are smaller increases than in previous years.
- • Commission remains the dominant source of revenue for mortgage and insurance broking, accounting for 77% and 83% of revenue respectively. For retail investment business, commission accounted for 16% of revenue while fees/charges accounted for 82%.
- • 94% of financial adviser firms reported making a profit in 2019 with total pre-tax profits down to £808m from £872m in 2018.
- • Small firms remain a significant part of the intermediary sector. Nearly 9 in 10 financial adviser and mortgage broker firms have 5 or fewer adviser staff. Firms with 1 adviser made an average total revenue per firm of £208,000 in 2019, up just over 1% from £205,000 in 2018.
- • Compared with 2018, the total spent on professional indemnity insurance (PII) premiums by financial adviser firms increased by 17% from £94.4m to £110.3m. PII premium as a percentage of regulated revenue has increased in 2019 for financial adviser firms when compared with 2018. The smallest firms pay a higher proportion of their revenue; 2.3% for mortgage brokers, 4.4% for financial advisers and 5.5% for insurance intermediaries.
- • Firms providing retail investment advice, report that revenue from Initial advice charges has decreased by £273m (-14%) to £1.67bn, while revenue from Ongoing charges has increased £529m (16%) to £3.89bn.
Scott Stevens, director of adviser recruitment and acquisition at Quilter Financial Planning, welcomed the findings.
"Financial advisers have adapted remarkably well in the years since the RDR, with a dramatic shift to recurring revenues and ongoing fees over commission-led profits," he said. "The industry has shown itself to be incredibly adaptable, and those advisers that transformed their businesses have emerged stronger for it.
"However, business owners have also faced challenges. Today's data from the FCA shows that across the market, revenue growth was weaker in 2019 than previous years. Political uncertainty over Brexit and the 2019 UK General Election led to some caution from investors and prospective clients, making it a challenging environment for financial planners. At the same time, the cost of professional indemnity cover, a substantial overhead for adviser firms, increased substantially.
Stevens called the UK financial planning industry a "patchwork of local firms that are deeply rooted in their communities" and warned that small businesses will face challenges and will need extra support in 2020 r in what is "a uniquely challenging year", with some firms juggling questions about whether to partake in the government's business support and job retention schemes, while dealing with the challenge of servicing clients remotely.
"But we're also seeing plenty of positive stories from businesses that are adapting," he added. "And firms that have developed close, trusted relationships with their clients are finding that their services are more valued than ever before, with clients seeking reassurance and expert support navigating economic uncertainty.
"And there are plenty of reasons to be positive. We know from our experience of the last financial crisis in 2008 that adaptable firms bounce back stronger and better than ever before. The ingenuity and entrepreneurial spirit saw financial planning firms embrace a challenging market and incoming regulatory reform, with many firms not just surviving, but thriving as they transitioned to fee based models.
Stevens added that the industry can also expect to see many clients relocating as their own employers pivot toward home-working.
"Advisers that have invested in building strong customer relationships will be able to retain those clients, even if they're no longer based locally, and will be well placed to help them adjust their financial plans if their life goals, living arrangements, work and retirement plans change in 2020 and beyond," he concluded.