I’m on the record as being a massive fan of the Nucleus census.
While it's true that it's based on feedback purely from Nucleus users, I firmly believe they are a good proxy for the wider advice market and, for me, the census consistently delivers good quality insight.
This year, the following points made headline reading for me:
1) Adviser fee patterns
Advisers are moving away from an ad valorem or percentage of assets-based charge to a more combined charging structure, for example fixed fees and an ad valorem charge.
According to the census, around a third of advisers are now using this kind of charging model. So what are the drivers behind this change?
Post RDR, many advisers charged up to 1 per cent for ongoing advice. Over the years, separate data from Nucleus has indicated that this charge has slowly been reducing and this year the average ongoing advice charge sits at 0.79 per cent.
A combination of low investment returns, as well as Mifid II driving increased charges transparency, means advisers have to be very clear about the costs of services delivered to clients and the value of these.
In the early days post RDR, platform technology enabled advisers to build and manage model portfolios.
This was a vast improvement on previous processes, which were supported by spreadsheets, calculators and manual switching.
Clients could now see that advisers were regularly monitoring and managing money on the platform, and paying a monthly fee for this service (in addition to others) was accepted.
However, the move towards outsourcing the investment management of client portfolios challenges this model.
Outsourcing can reduce investment research time, make a business more efficient, reduce investment risk and so increase the amount of time available to spend with clients.
But does that also pose a challenge on the level of clients' fees if they are now paying an additional ongoing charge to an investment manager?
Charging for services and advice is not necessarily the issue, but it is the way in which these are being charged which could come under pressure.
Clients may be happy to pay for specific advice as the need arises, for example for inheritance tax and tax planning and pension advice. These ‘one-off projects’ could incur a time-based charge.
Yet paying a regular monthly charge, which has been floated as an alternative fee model, would be on top of the investment management charge, the cost of the investments themselves, plus the platform charge. This might become a more difficult conversation as charges become more transparent.
Perhaps the census indicates an emerging pattern where the ongoing monthly charge is gradually reducing to a level covering standard services, but that fees are charged when clients have specific requirements?
2) Attracting younger clients
This is becoming an increasing concern and almost a third of advisers say attracting younger clients is an issue for them.
This was particularly interesting in the light of separate research from Sanlam which found that 80 per cent of advisers also believe intergenerational transfer of wealth is a significant opportunity.
If this is true, then many advisers could have a ‘ready-made’ bank of younger clients.
Yet the challenge is how to manage them profitably, particularly as many advisers have business models set up to deal with more affluent clients.
Lack of engagement with the next generation could be a fatal mistake. Turning up at the reading of the will is not enough to prevent assets moving to the next generation and out of the adviser business at the same time.
I recently met an adviser who has recognised this challenge and starts engaging the next generation from the age of 10!
This might be extreme, but he has reviewed the asset pools in the business and recognised the value at risk if he doesn’t engage and start to have family conversations.
The added concern he had is that any potential acquirer of his business will ask about his long-term asset retention strategy.
If a significant proportion of the business is at risk, and so potentially reducing the valuation, he believes he needs a strategy in place.
Some advisers have started to create specific client segments and propositions to engage with those likely to inherit wealth.
Their current focus might be on protection, school fees planning or simple savings strategies into pensions and Isas. Other advisers are training their staff in soft skills to help them tackle some of the difficult family conversations around wealth transfer and tax planning.
Advisers are also looking at how to use technology to engage with a different generation, and to deliver cost-effective, profitable services for clients currently deemed as ‘lower value’.
If addressed, intergenerational transfer of wealth may not just be a retention strategy but also a growth one.
3) In-house model portfolios
The use of in-house model portfolios continues to remain at around 50 per cent. of adviser businesses. But the expected future use of outsourcing of investment propositions continues to rise. Is this a contradiction?
As advisers get to grips with the product governance (PROD) rules and client segmentation, investment solutions are being examined.
I believe we are seeing advisers offering a range of investment solutions aligned to different segments, with many using a combination of both in-house models and outsourcing.
The Mifid II reporting requirements may have also impacted the number of advisers delivering their own investment proposition going forward, as the regulatory challenges add further business costs.
Also, the number of advisers seeking discretionary permissions is on the slide with only 6 per cent considering this and 11 per cent already holding these.
So the position on outsourcing is definitely one to keep an eye on.
4) Increase in active clients
A few years ago, the anecdotal evidence was that an adviser typically managed about 100 active clients.
The census indicates this number has continued to increase and now stands at 163, with advisers predicting this will continue to rise.
What is more, only 15 per cent of advisers spend more than 40 per cent of their time with clients, a reduction from 21 per cent last year.
Advisers may want to consider looking at where the remaining 60 per cent is allocated – are there other ways of resourcing or outsourcing this?
Overall, the findings suggest adviser business models are in transition – watch this space.