Planning! August 2018

When I worked in the industry, it was about this time of year that we started the dreaded planning process. I say dreaded because every year the process became more complicated and increasingly meaningless. Why meaningless? Because the bottom- up numbers that we painstakingly developed through God knows how many boring internal meetings were then “calibrated” at group level. And, inevitably, our projected revenues were increased and our projected expenses reduced. Basically our work was a complete waste of time.

The one element of the process that did make sense was the development of a market context for the next couple of years. Needless to say there were highly sophisticated models to populate but it usually boiled down to potential risks and potential opportunities. So I thought it might be worthwhile to think about the 2019/20 contexts for advisers in the long tem savings, investment markets. In no particular order:

Potential risks

Market meltdown: Clearly a possibility but the impact on the financial advice sector was (relatively) limited in 2008 when the credit crunch got going. However a long- term bear market would reduce initial and on-going fees and play havoc with many players’ profits and forecasts.

Brexit: Who knows? In my opinion, whatever happens will not strike a serious blow to the sector in the immediate future. But see “market meltdown” above.

Defined benefit transfers: There is a possibility that the FCA will implement some sort of comprehensive total review process; not dissimilar to that which was required back in the days of “Pensions miss-selling””. This could be debilitating to say the least. And it could also inflict serious brand and possible financial damage to the financial advice profession. There is also the possibility (probability?) of banning contingent charging in this space.

Contingent fees. One could argue that if contingent fees create a conflict of interest in the DB transfer space, (which of course they do) the same argument could be used across the board. Clearly this is a potential risk that would have a major impact across the whole market but I doubt the FCA would wish to cause such disruption at this time.

Pimlico Plumbers precedent: The recent Supreme Court judgement that the reassuringly expensive self-employed plumbers were actually employees will be of great interest to HMRC. And to The Treasury who are looking to raise money from every available source. My guess is that more than half of financial advisers are currently taxed as self-employed so this could be a very serious challenge for the market.

Labour Government: Another possibility. I can still recall the left wing government in the early 1970’s introducing 98% tax on unearned income. If my memory serves me correctly it created as many opportunities as it did problems. But we might not be so lucky this time.

Potential Opportunities

Flat rate pensions tax relief: Provided they remove all the complicated rules around contribution limits!

Defined benefit transfers: This will remain a massive market for professional financial advice and the demand will exceed the supply for the foreseeable future.

The divestment market: There is about £1trn of investable assets in the hand of the 50+-consumer segment. The proportion looking for divestment advice is growing all the time and here again the demand exceeds the supply.

Technology: Most advisers are already using technology to improve client outcomes, reduce costs, mitigate risk and increase productivity. I think there is an opportunity for artificial intelligence to produce further and exponential improvements in these areas. But it must support rather than drive the business.

Equity release: I know many advisers and commentators have been sceptical about these propositions but business volumes have grown substantially over the past couple of years. I gather that some providers are now prepared, or preparing, to release equity on a monthly basis. Clearly this is more attractive than releasing lump sums and depositing them in account that delivers less than half of the interest being charged.

Diversity: There is plenty of evidence that firms with a diverse workforce can achieve better productivity than those without. And I think most of us would agree that white men, mostly aged over 50, dominate the financial adviser community at the moment. Of course there is no quick and simple answer to exploit this opportunity but some small steps might pay large dividends

Regulation: Yes, regulation! MiFID II and PRIIPs are no doubt well intentioned. But what I hear is that the sheer volume and complexity of the “information” is leading to consumer apathy rather than understanding. A key adviser skill is turning this sort of complexity into simplicity and this will be valued even more by clients faced with piles of additional regulatory gobbledegook.

Intergenerational wealth: Of course this is a problem as well as an opportunity. But let us focus on the positive. I hear an increasing number of success stories based on advisers setting up family meetings to discuss family finances so that the next generation understands the plans that are being made and the adviser stars to build appropriate relationships.

Conclusion?

Perhaps the best way to look at it might be this. Given the risks and opportunities identified (and of course there are many others) would this be a market worth entering?  I think the answer is yes. And if one needs any evidence one only has to look around.

The recent FCA Data Bulletin on intermediaries shows that most firms are in good financial health. The transaction activity suggests that there are a lot of organisations looking to acquire quality firms of all shapes and sizes. These buyers include life companies, asset managers, discretionary fund managers and of course other financial adviser firms and consolidators. So it all looks pretty positive to me.