Tim Sargisson: Stop doing things you shouldn’t be doing
There are some clear reasons why profitability is declining across the advice sector but also, points out Tim Sargisson, some equally clear courses of action firms need to be facing up to sooner rather than later
Firstly, congratulations to Julian, conference producer Helen Danzey and the rest of the team at Professional Adviser for all the hard work that went into the inaugural PA360 event at The Brewery in London last month. An excellent event and I am sure one that was appreciated by all who attended.
It was a pleasure to have the opportunity to be a panel member to debate the subject of how to build a profitable adviser business. Certainly, a propitious time to be discussing the subject as profitability in Adviserland declines.
According to APFA and the FCA’s numbers, retail investment advice generated about £3bn of turnover in 2016 – up from £2.75bn in 2015. That 9% increase is largely due to market rises, along with advice over pension freedoms and Brexit.
The straw in the wind, however, is the worrying trend that profits are falling – down from £890m in 2015 to £779m in 2016. In the main, this is because it is becoming more expensive to run an advice business and the question to ask is – why are we seeing this when the demand for advice is increasing?
There are some obvious answers – increased regulatory costs being one. FCA and PII costs keep going up while the FSCS continues to bite – there is a levy of £336m to cover the next nine months, due to legacy issues from poor advice outcomes.
Less obvious factors include the time and resource that must be diverted away from earning fees to deal with constant change, such as MiFID II, GDPR and so on while, next year, we will also have the Senior Managers & Certification regime to contend with.
And onward to the less prosaic – for example, firms finding it hard to demonstrate ‘value’ and for clients to appreciate value. This means that, as advisers, we can end up selling ourselves short in terms of what we charge for our services.
The critical issue we are now seeing, however, is the margin pressure building due to a shortage of highly skilled advisers and paraplanners, with existing members of both groups beginning to command higher wage packets.
Research by Leeds-based specialist recruitment firm BWD has highlighted average total earnings for advisers reached £93,100 in 2017 – up from £81,500 in 2016. Allied to this is the fact that, according to research by Libertatem 7,000 advisers are set to retire within the next five years and 13,000 over a 10-year period. A basic understanding of economics tells us that scarcity = higher prices.
The brutal fact is that it is too expensive for many to operate profitably in this market and so we are now seeing a perfect storm where scarcity of much needed resources is going to further push up costs.
What, then, can be done to address the decline in profitability across the sector? The two choices available are to look at ways to reduce costs and/or to become more efficient.
That said, 91% of retail investment firms have fewer than five advisers and, for the smaller firm, the harsh reality is there just are not that many levers to pull to influence a cost base and at the same identify areas to improve efficiency, as the real squeeze on margins begins to bite.
I have said before the way to solve this problem comes down to scale and where there is a real need for scale in our industry. Little things do not make a difference by themselves but aggregate them up and look at the efficiencies they generate and it does become quite significant.
Significant improvement
While scale is undoubtedly the answer, this has to make a significant improvement to an adviser’s working life, as well as delivering against client expectations. Client investment objectives, for example, should not be compromised by being simply shoehorned into a centralised investment proposition as a part of ‘being big’.
Neither should firms simply offload the increased regulatory burden onto the adviser, with ever-increasing amounts of paperwork for the adviser to deal with as large firms with scale adopt a ‘computer says no’ approach until mountains of paperwork are filled in to support a recommendation.
We know from our own conversations that numbers of advisers are not so concerned about making more money but I have yet to meet an adviser who would not welcome a reduction in paperwork and administration – where playing an extra round of golf a week or spending more time with the family is what really matters for them.
Fundamentally, success will be determined by finding a way to stop doing stuff you should not be doing. What this points to is a lot of inefficiencies in advice businesses – advisers and paraplanners doing a lot of things they just do not need to be bothering with.
One further solution is to use the support of a professional services company that will take on a large part of the investment risk and deal with paraplanning, compliance and all the other important stuff. This lets you get on and run your business the way you want to run it and to spend more time with clients and family. Now those are the things you should be doing …
Published 15th May 2018