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State of the Advice Nation – what is keeping advice firm owners awake at night?

Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.

We know from reading the financial headlines that outflows from adviser platforms hit record highs in 2023 as investors tapped into pensions and ISA savings to see them through the cost-of-living crisis. Almost everyone has been impacted one way or another – whether needing to manage higher household bills and spending or to support less well-off family members.

2023 was the toughest year for advice businesses for some years, but despite this, things seem to be looking up: a third are now bullish and predict growth in the year ahead.

Each year, financial consultancy the lang cat produces its annual State of the Advice Nation report to better understand the advice profession and the challenges facing the sector. Now in its sixth year, the latest findings reveal how businesses have adapted to major regulatory reform, hostile markets, and the impacts these issues have had on their clients’ investment portfolios.

Regulatory burden

Looking at what’s keeping advisers awake at night, it will come as little surprise that fears of further compliance and regulation topped the list during the year of Consumer Duty implementation. In fact, this is the main issue causing a third of advice business owners’ sleepless nights. Many expressed concern that the pace and volume is difficult to contend with. On top of this, cost implications are also causing stress and impacting the bottom line.

Looking at Consumer Duty alone, the majority said they’d made around three changes to meet the new rules. Nearly half have adapted the way they communicate with clients, four in 10 said they’d changed their approach to client segmentation, and more than one-in-three have adapted their pricing strategies. Two thirds also said Consumer Duty has resulted in changes to the way they support vulnerable clients. This is good news given vulnerability is a key area of focus for the regulator.  But it also begs the question, what about the remaining third of businesses – do they already have the right systems and processes in place to support customers with additional needs, or are they yet to address them?

Asked their thoughts on whether the net effect of the regulation has been positive or negative, the responses reveal a mixed bag. Some expressed concerns about a widening of the advice gap due to client segmentation and a review of fees – for example, will some clients be priced out of the market? On the other hand, some foresee better service for clients and improved confidence in the profession. Interestingly, many commented that their focus has always been on the best possible outcomes for customers, but the regulation has made them more aware of the need to document and monitor their approaches – the golden thread that runs throughout Consumer Duty.

Client expectations

Besides implementing new regulation, a fear of failing to meet client expectations has been a source of restlessness over the last year. This issue is more prominent than in previous years, no doubt, reflecting the economic backdrop. Respondents talked about the lack of acceptance from clients about lower returns and needing to deliver difficult messages about the impact on retirement plans. Over a third said they’d adjusted financial plans for one in 10 clients last year who looked to support family members, deal with increased mortgage payments, or manage higher household expenses. The findings show that the cost-of-living crisis has indeed impacted almost everyone.

Investment trends

As well as exploring some of the immediate issues facing advisers, the report tracks trends in areas like the use of technology and the choices firms are making when building their investment proposition. A highlight from this year’s study shows that DFM MPS (Discretionary Fund Manager Model Portfolio Services) has now become the dominant segment across investment models as the advice profession moves away from manufacturing.

There will be multiple factors driving this shift, not least Consumer Duty but also the costs and risks associated with advisers building their own portfolios and the time and expertise required to do this effectively.  And, of course, as the nature of advice evolves,, the shift to outsourcing frees advisers up to do exactly what they do best.  That is to provide a holistic advice service to their clients based on an in-depth knowledge and understanding of their unique requirements. 

And just as businesses prepare to implement more regulation in the form of the Sustainability Disclosure Requirements, demand for ESG (Environmental, Social and Governance) investment solutions appears set to stay. Almost a third of firms say that at least 15% of their existing clients are invested in these products and more than a third expect demand to grow.

This presents an opportunity for advisers to revisit their propositions in line with client demand. At the same time, it means we need to be up to speed with implementing the regulation – quite possibly at the expense of a good night’s sleep.

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Past performance is not a guide to future performance. The value of an investment and the income generated from it can fall as well as rise and is not guaranteed. You may get back less than you originally invested.

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