3 min read 18 Aug 22
Success is personal. Not my favourite inspirational quote but I’m using it as part of a disclaimer: you will have your own feelings about how 2022 is going and how 2021 went and the following overview of the market might not reflect how you feel about it. I only like to think it will.
That is because, every year, the FCA shares a few insights on the financial advice market, based on data drawn from the Retail Mediation Activities Return (RMAR), and things are looking, well, stable. Heartening, even. Here are some highlights.
One intriguing insight from the FCA’s data dump concerns preferred charging models and the story of ongoing fees.
Ever since 2016 – the farthest back we can see this data point – ongoing fees as a share of total income have been growing. They now account for 73% of the total, up from 72% in 2020 and a whopping jump from 55% in 2016.
To continue the theme, advice firms onboarded considerably more ongoing clients than they lost last year, with more than 409,000 registered as new. According to the FCA, there are now more than three million ongoing clients, or almost 5% of the UK population.
Meanwhile, for both initial and ongoing charges, the most popular model remains percentage-of-investment, followed some way behind by fixed fee, then per-hour. The average maximum charge levied for initial advice on a percentage-of-investment basis, whether independent or restricted, was 3%, while the minimum was just over 1%. The minimum average for ongoing advice, again regardless of type of advice, was 0.5% and the maximum was 0.9%.
Independent firms now account for 90% of all advisory businesses in the UK, the FCA said, with the remainder restricted (and discounting the small number that indicate they offer both services).
Interestingly, though most firms are independent, they account for less than two-thirds of the total value of adviser charges collected (62% in 2021). This may seem low, proportionally, but it has been there or thereabouts for years, topping out at 67% in 2016. A big shift appears to have occurred between 2015 and 2016, when, though the proportion of independent firms was similar, at 85%, they brought in only 38% of the total value of adviser charges, according to the FCA’s numbers.
For reasons unexplained, the proportion of revenues generated by independent firms jumped from 38% in 2015 to 67% in 2016 and has (pretty much) stayed there since.
According to the RMAR, so many advisory businesses are operating profitably that it is almost anomalous to run at a loss (though there may be many reasons firms do).
Smaller firms prospered in 2021, the FCA said, with 96% of one-person firms making a pre-tax profit, and 95% of firms with between two and five advisers doing the same. Larger firms fared less well (though still very well) with 92% of those with between six and 50 advisers reporting a profit. One wonders whether the data from a bracket as broad as six to 50 offers anything particularly useful, but some data is better than none. Only three quarters (78%) of firms with 50 or more advisers reported a profit last year.
Typically, firms with between one and five advisers retain around a third of pre-tax profits for future use, while larger firms (it’s that 6-50 bracket again) retain a bit more, keeping hold of 44% in 2020.
Revenues earned for retail investment advice in 2021 were up 22% on the previous year, rising from £4.4bn to £5.4bn, and have more than doubled (up 106%) since 2013.
If we’re looking at this from a great height, as the FCA is, this equates to an increase of 87% in average revenue per firm between 2013 and 2021 (from £566k to £1.06m). In fact, average per-firm revenues on retail investment advice have risen every year since 2013, with the increase from 2020 into 2021 the largest.
Elsewhere, the proportion of total retail investment revenues derived from commission has, as expected, continued to fall, as it has every year since 2013, when it was 56%. In 2021 it was 13%, down from 14% in 2020.
With things looking fairly rosy across the advisory sector, it feels cruel to finish on a sourer note.
According to the FCA’s data, professional indemnity insurance as a percentage of revenues continues to pinch for smaller firms. Premiums represented 5.9% of income for those bringing in up to £100k in 2021, and 3.4% on average for firms with between £101k and £500k revenues. Both figures were up from 5% and 3.1% respectively on the previous 12 months, and from 4.2% and 1.9% from 2017, the first time the FCA shared insurance premiums data.
Finally, firms with revenues of £10m and above faced premiums as a percentage of their regulated income of 1.3% in 2021, a similar proposition to 2020 and in the three years before that.
Mike Barrett is Consulting Director at the lang cat
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