NO ONE HAS PROVEN THAT ADVICE IS A SCALABLE BUSINESS

NextWealth Financial Advice Benchmark Report has been published this November 21 and is available to download.

The research makes interesting reading.  Provided by Heather Hopkins it confirms that clients of advisers working in the largest firms pay more than those serviced by smaller firms.   The spread, or differential, is 12bps.  Worse still, where the bigger firms have simplified models, known as restricted advice, then the fee spread differential goes up again, to 28 bps.   Is that because it is more expensive to supply restricted advice from bigger firms?  

It doesn’t seem logical that the big restricted firms are routinely charging an extra £280 per £100k per annum.  Over the average lifespan of the average investment, which is recorded as £348k over 7 years, this equates to just under £7,000 in added fees.  This strange outcome supports IFAC’s long held view that unlike in many other businesses that find efficiencies in scale, in retail financial services there are reverse economies of scale at play.  All that money to the back office!  The bigger the firm the higher the standards they are required to apply, and the more resources are committed to back office functions.  While in pure investment management winner takes all, on the retail side, the only real economy of scale is the size of the client’s bank account.   

The client size is of course the place to look - turn left at the top of the steps and you're in first class, and mixing with the richer set.   The average portfolio size is, according to the survey some £345k.  If this makes you feel inadequate, then please remember that surveys are scientific in their collection, but the data subjects – people – are well known for exaggerating their abilities and in the case of IFAs, this often translates to over-estimating the size of their portfolios.   But even going for bigger average portfolio sizes is not a panacea cure.  “I wouldn’t get out of bed for less than a million, let alone take on a new client at that level” sounds great but in reality your biggest customer always has a godson, nephew or little jimmy who has been given money for an ISA, and takes up management time when arranging a new mortgage.  You cannot easily sack them all without damaging your firm’s reputation with the big customers.  

The fact is that no one has proven that advice is a scalable business.  

Now back to that survey.  What about the new big thing of 2021, ESG?  Well, the highest proportion of clients invested in ESG is held by the sole traders, at 27%. Interesting - because the sole traders have lower average qualifications than those in larger firms, mostly stuck at level 4. 

If you feel comfortable being a small IFA, then don't be. There is a lot to be said for focus, and, as they say, turnover is for show, profit is for dough.