This is a question that many directors of financial planning firms are asking at present. Inevitably, with raised interest rates, the cost of capital has risen and many of the private equity (PE) and family office-backed buy-and-build firms are under pressure.
We can also see the pressure bancassurers face, with Nationwide having passed its financial-advice business to Aegon and Santander announcing significant job cuts. Advisers across the profession are becoming less, not more, productive.
As our Financial Planning – Fascinating Facts and Figures 2024/5 states, the most recent available data from the FCA (2023) shows that revenue generated by intermediary firms (retail investments) in 2023 decreased by 3% to £5.34bn.
Pre-tax profits tumbled across the board in 2023, with advice firms with over 50 advisers seeing their losses increase by 325%. Firms with 6-50 advisers saw a decline of 15%, and firms with 1-5 advisers fell by 12%.
Every size of advice firm saw a decline in average retail investment revenue per adviser. Despite the rise in total earnings for advisers, fees generated per adviser dropped by 3.5% in 2023, from £207,302 to £200,012. Perhaps surprisingly, the productivity per adviser is lower in larger businesses than in small ones.
What’s happening at present?
We see many PE-backed consolidator firms primarily focused on integrating several client books, whereas just after the pandemic, it appeared that companies could acquire firms and flip them for a profit. Today, the hard yards of integration seem to be the way to go, particularly with the impact of the Consumer Duty.
Integration is a challenging task, and we’re aware that some companies’ client books are under pressure after advisers leave the business following a merger.
I have heard the word ‘chaos’ used in connection with some of the PE-backed consolidators
Of course, you wouldn’t expect advisers to breach their covenants, but some can be quite short. If a company struggles to retain its advisers and service its clients effectively, it can leave the clients exposed and very open to approaches by their previous advisers – with whom they had built a relationship – when their restrictions come to an end.
Some companies are moving backwards in terms of adviser productivity, and I have heard the word ‘chaos’ used in connection with some of the PE-backed consolidators and evidently unstable advice teams.
One contact recently told me that their employer, a high-profile acquisitional consolidator, is “more of a disorganisation than an organisation”, with regular adviser resignations due to corporate inflexibility, poor client management, missing MI and disinterested leadership.
This puts even more pressure on the remaining advisers, who are left to complete an unreasonable number of client reviews in an unrealistic time period in pursuit of profit.
Too busy to grow their book
Most firms are choosing to trust their expensively acquired client books to experienced financial planners, who do a great job of serving their clients and protecting their client books but not such a great job of growing the number of clients.
Even when problems are less acute than those detailed above, many of the most experienced financial planners have large client books that need servicing. They might be overwhelmed or certainly at capacity, which will clearly impact their ability and hunger to bring in new clients and write new business.
An absence of growth mindsets
We’re all aware that a significant number of financial advisers in the UK market are approaching or at retirement age: 57% are aged 50 or over and 22% are over 60.
Many of these individuals are sitting on significant client assets, which are important to their firms and are remunerated very well to look after them. They are no longer in the first throes of youth and perhaps no longer motivated to go the extra mile to generate new business.
With that in mind, it is doubtful that these individuals will suddenly turn over a new leaf and become new business generators.
Many advisers are perhaps no longer motivated to go the extra mile to generate new business
Unfortunately, you may also be finding that many of the recently qualified advisers are also not writing much new business (or much business at all). In fact, they are actually leaving the profession at a faster rate than they are joining it.
They are not generally trusted with the company’s most valued clients, who have the most complex needs. In many cases, they have the capacity to take on new clients but not the right clients to supply the right type of referral.
So, what is the answer?
1. Segment the clients
Ensure the most talented planners have the right client bank of high-value clients with a manageable enough number of clients, so they have scope to take on more.
Experienced advisers with many lower-net-worth clients need to hand these off to enable them to focus more on their higher-net-worth clients and hopefully gain referrals to service other new high-net-worth clients. We all know that people generally have friends in their income bracket. This helps with the Consumer Duty obligations as well.
2. Give financial planners the right tools to do the job
It is vital to use staff and technology efficiently to deal with clients effectively. Advisers provided with paraplanning and administration support can spend far more time with their clients and grow the client book. An adviser will be most productive if they have the right number of clients.
3. Pay the rate for the job and provide the right incentives
I understand that not everyone is motivated by money, but when I speak to financial planners, the conversation often moves to whether they are earning the right rate for the job.
As you would expect from someone who is used to helping clients maximise their wealth, remuneration is important to most of the financial planners I speak to. The basic salary plus any KPI bonuses should be for looking after clients, and volume bonuses should be for growth.
Financial advice businesses must provide additional bonuses to promote the right behaviours. These include KPI bonuses for ensuring clients are happy and receive first-class service, and a share of the prize for financial planners who can grow a firm’s value by bringing in new clients or assets and ultimately generating new ongoing fees.
Many employed advisers are happy where they are with good clients, a good package and benefits
The old-fashioned model of rewarding advisers based on a percentage of fees, which just rewards them for sitting on a client book and hoping the stock market rises, is no longer appropriate.
4. Hire some additional financial planners with a growth mindset
Financial planners with a growth mindset are out there, but they need wooing. Like eagles, they don’t flock and you have to find them one at a time.
There are 27,941 financial advisers in the UK working in 4,654 Advice firms. 50% of them work in the 50 largest firms and a further 25% are sole traders. With a few notable outliers (the product providers and networks), most firms now choose to employ their financial planners.
Many employed advisers are happy where they are with good clients, a good package and benefits. Many of them no longer have a growth mindset, so your focus needs to be on hiring someone with the right attitude who is hungry to grow the client bank you can provide.
Once you have segmented your clients, provided your financial planners with the right tools for the job and implemented a motivational bonus scheme, you are ready to hire a financial planner with a growth mindset.
You just have to find and secure the right one!
Paul Harper is managing director of Paul Harper Search
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