Ask any group of advisers about their businesses and virtually all of them will be very cheerful about the last few years since the Retail Distribution Review (RDR). Markets have been booming, and so clients are happy. New business is rolling in and platforms, fund groups and life companies are getting their act together – some more than others.

    FCA figures reflect these times of prosperity. Total revenue for advice firms has risen steadily from £2.6bn in 2013 to £3.3bn in 2016, based on advisers who complete the FCA’s Retail Mediation Activities Return. And there has been steady growth after a period when the numbers of both advisers and adviser firms had fallen in the run-up to the RDR.

    The main driver of adviser income is investment business, based on the same data from the FCA (see the FCA data bulletin from 9 May). The vast majority (84 per cent) of the advisory sector’s income is derived from retail investments. Other activities are tiny by comparison, with insurance income just 11 per cent and mortgages a mere 5 per cent.

    In practice of course, we think the income picture is rather more complicated. Advisers mostly charge on the basis of the value of their clients’ investments, either overtly as a percentage or less obviously as a fixed fee that typically reflects the levels of clients’ assets under advice (AuA). But clients value a range of other aspects of advisers’ services, of which looking after their investments is just a component, although a very important one.

    Around 58 per cent of advice firms charge their ongoing fees based purely on a percentage of AuA. Some 16 per cent have a fixed charge for ongoing advice, although anecdotal evidence suggests fixed fees are typically fixed by reference to AuA – at least in a rough and ready way.

    A further 10 per cent of firms charge for ongoing services on a mixed basis and only 16 per cent charge on a time-cost basis. These figures almost certainly understate the value of charges made on the basis of clients’ assets, with large firms tending to use this approach. Time-cost charging tends to be the province of boutique advice firms.

    At Platforum, we think advisers will increasingly want to mix their charging structures to reflect the other services they provide that aren’t necessarily so closely linked to the value of clients’ AuA. Tax and financial planning are broadly connected to assets, but there are lots of exceptions, such as business clients and those in drawdown nearing the ends of their lives.

    Increasing numbers of advisers think it is worth putting greater emphasis on the value clients get from tax and financial planning advice. They also are concerned a major correction in the market could lead to a very substantial cut in adviser charging income with little or no associated reduction in costs.

    The great success story for advisers has been the conversion of services and the charges for them from initial one-off commission and fees into ongoing annual income. More than twice as many clients received ongoing advice in 2016 (970,739 clients) as got one-off or initial advice (over 2.2 million clients).

    The number of new ongoing clients also grew by almost 500,000 last year, with only just under 80,000 ceasing to be ongoing clients – a considerable success story in itself.

    The total value of ongoing advice at £1.6bn was about 20 per cent more than the value of initial advice. But this masked a huge difference between the average performance of independent and restricted firms. The income of restricted firms from ongoing advice was just over half what they received from initial or one-off advice - £640.8m for initial/one-off advice compared with just £331.9m for ongoing advice.

    In contrast, the independent sector was spectacularly the other way round, with their income from ongoing advice at £1.3bn nearly twice that of their income from initial/one-off advice.

    Given the two sectors have roughly the same number of individual advisers, what might be the explanation for this enormous difference in performance?

    It is probably less about the two business models, particularly when you consider there are restricted advisers with very high levels of ongoing income. It is likely to be more to do with the maturity levels of most businesses in each sector.

    Independent firms tend to be older and more mature businesses that have had the time and skill to build up their ongoing income. At Platforum, we will be watching closely to see whether the contrast between the two sectors will persist in the longer term.

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