Tim Sargisson: Restrict risk, not revenue

Last month, the Financial Conduct Authority (FCA) published the latest edition of its Data Bulletin. The regulator’s focus was on the retail intermediary sector, based on a newly published analysis of firms’ Retail Mediation Activities Return (RMAR). The RMAR is submitted by approximately 12,000 FCA-regulated firms and it is the first time the FCA has published the data.

The Data Bulletin is a treasure trove of information and is especially useful in allowing firms to see where they sit compared with their peers. Of special interest is Section 4 – “Retail investment advice and adviser charges”. This section provides information on investment advice and related charges where a firm provides a personal recommendation.

The split in terms of type of advice provided by number of firms is still overwhelmingly independent, with 83% holding themselves out as independent, where the firm’s recommendations to clients must be based on a comprehensive and fair analysis of the market; and is unbiased and unrestricted.

Restricted advice accounts for 14% of firms, with the balance of 3% providing both types. Despite being very much the smaller of the two, however, the restricted model accounts for nearly two thirds of adviser charges – at 62% compared to 38% for independent advice.

The data also shows that for firms with a single retail investment adviser, the average revenue is £92,000 from retail investment business. Firms with more than 50 advisers had average retail investment revenue of £124,000 per adviser.

If it is likely that firms with more than 50 advisers are restricted and the smaller firms continue to value being independent – as the 83% figure indicates – what do these numbers tell us? Can we say with some certainty that providing clients with a restricted offering does not impact on what you earn? Indeed, it would seem the opposite is true. Restricted apparently provides a fillip to earnings.

Ideology of independence 

In my experience, financial advisers can be wedded to the ideology of independence without necessarily understanding whether it remains the most appropriate direction of travel for their business.

We know from various research that consumers neither understand nor care about the distinction – consumers are for more interested in working with someone they trust. Surely, helping provide a comprehensive and fair analysis of the market, which is both unbiased and unrestricted to demonstrate independence, requires firms to allocate a disproportionate amount of time, resource and cost.

While we continue to focus on a distinction that is irrelevant in the eyes of the consumer, the consumer continues to drift away. The FCA’s Data Bulletin includes a section on the latest trends in the retirement market – showing a decrease in the percentage of customers taking regulated advice when drawing retirement income.

For drawdown in the first quarter of 2016, 58% used an adviser compared with 68% in the previous quarter. For annuities, the same comparison was 38% versus 42% and, for full withdrawal, 29% employed the services of an adviser in the first quarter of 2016 compared with 37% in the last quarter of 2015.

It is important to remember the retirement market is really important to the advice industry. Again, using the FCA’s own analysis – in this case its Product Sales Data – more than 75% of an adviser’s work is in the field of pensions.

The term ‘restricted’ is a poor description for our segment of the market and I live in hope the Financial Advice Market Review – or something else – will improve it. The restricted model is not about providing less, but should be about providing the key to managing risk in a client’s portfolio.

For the majority of people requiring financial advice, the only thing wrong with the restricted advice approach is the name. As consumers, we tend not to want narrow choices – we perceive that, if something is restricted, we might deprive ourselves of something that is better. Everyone likes choice but few of us like to choose.

That said, long-term investors need risk management now more than ever – particularly with regard to knowing when to take risk off the table. This is increasingly critical for investors looking for a comfortable retirement where the focus of any investment strategy has to be on long-term outcomes instead of short-term gains.

The real driver of long-term returns is the ability to manage risk successfully and this will become increasingly important in attracting fresh clients. Advisers need to position themselves as architects who deliver a personalised service and both independent and restricted provide a mechanism to engage with consumers.

Still, if the restricted approach allows advisers to spend more time charging fees – and, dare I say, charging more – then so much the better.

Published on 22nd November 2016