Money Marketing: New threats to growth.

Following a decade of success for advisers, opportunity still exists. However, the cost of delivering advice is spiking higher whilst revenue growth is beginning to slow. Amid the turbulent economic environment, financial advisers are facing headwinds in the form of regulation, inflation, and capacity. From consumer duty to soaring energy prices, staff wages, and overhead costs, businesses are battling increased expenditures. At the same time, the tailwinds that the industry previously relied on to drive success are gradually dissipating.

The bull market of the past decade, with market growth of 11.11% annualised, benefited clients and those advisers charging on an ad valorem basis. The return of market volatility could significantly affect those businesses’ revenues and put prospective clients off from investing. Baby boomers—the wealthiest generation in history and the traditional demographic for advisers—are now retired and likely already working with advisers. Adding to the challenge of growth, rising interest rates and regulatory crackdowns all but ended the defined benefit boom and another source of new clients. For some advisers, the success of the past decade has meant they have simply reached capacity for clients.

Advisory businesses looking to continue their success, whilst balancing the needs of clients and regulators, may need to implement ideas that deliver transformative change. In particular, launching an in-house discretionary fund management (DFM) business as a way to enhance outcomes for clients and their businesses should be considered.

Improve efficiency and advice implementation

A DFM can help advisers generate greater efficiencies and increase control over their advice implementation without requiring consent from clients to make changes to their portfolios. This not only helps save time and costs (which could be passed back to clients), but it can also capture new opportunities to personalise and enhance client outcomes. For example, advisers can ensure that their investment proposition aligns with the needs of clients and their distinct advisory philosophy.

Maximise enterprise value

Launching an in-house DFM can enhance business outcomes by increasing revenue, flexibility around charging structure, and potential sale prices of advisers’ businesses. Adding another revenue stream through a DFM can allow for capital reinvestment in other business areas, while also improving profitability per client, and enabling firms to offer services to clients that were previously viewed as uneconomical.

Align business objectives, talent, and advice products

With 85% of advisers expecting a rise in overhead costs over the next six months, advisers are grappling with tough choices about managing resources in the current market environment.

• Maintaining client trust: Client confidence and trust are at the core of what helps advice firms run their businesses. For the success of advisers and their clients, it is imperative to build clients’ confidence in the firm’s discretionary fund management capabilities.
• Investment management talent: Firms need to ensure they have the right talent with the necessary skills to manage client portfolios. Businesses must assess if they have experienced and expert investment professionals in place. If this isn’t the case, are they willing to invest in the remuneration packages of experienced and competent investment professionals?
• Manage conflict of interests: Advisers must take extra care to ensure suitability when assessing recommendations for their in-house DFM over a third-party portfolio.

Particularly, when faced with the increased regulatory scrutiny and capital adequacy requirements that come with launching an in-house DFM, advisers should view this strategy as an investment to drive future growth.

For advice businesses considering whether it is in their best interest to launch a DFM, there are three options to consider: build, acquire, or partner. If updating an existing infrastructure seems daunting, firms can rely on a strategic partner to make the pathway more manageable, so advisers can remain focused on their customers and driving growth for their businesses. 

No matter which strategy an advice firm chooses to adopt, it is clear that the economic environment and client demographic will be changing in the years to come. The moment has arrived for businesses to think carefully about how to navigate the challenges of today in order to future-proof their businesses. Focusing on delivering the best possible client outcomes will be the key to helping advisers strike the right balance and stay ahead of the game.

This article first appeared in Money Marketing.

Important Information 

The following information can be sourced to:

• SEI, MSCI World Index (Net) GBP 11.11% 10-year annualised returns to end July 2023.

• Michael Klimes, "85% of advisers worried about rising costs", Money Marketing, 18 January 2023.

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