Do clients really need ongoing relationships with advisers?

Advisers are servicing more clients than ever. Since 2016, the adviser population has grown by a modest 9%, while the number of ongoing clients has surged by over 60%.

Nevertheless, there is under-supply of advice in the UK and only a small fraction of the population receives it.

Our recent UK Financial Advisers: Market Overview shows how the advice market is likely to reach capacity in a few years and that this is partly because the whole system is geared to delivering ongoing services for ongoing fees.

Annual charges constituted 78% of the average advice firm’s income in 2023, compared with 55% of firms’ income just seven years earlier in 2016.

Having an on-off relationship where the adviser has to start all over again after a long absence might be more problematic

Now, the Financial Conduct Authority’s most recent Dear CEO letter has put advice firms on notice that further scrutiny on their service models is coming.

The letter reinforces the regulator’s continuing concern about the need for ongoing advice in all cases. The regulator’s view, increasingly frequently expressed, is that advisers are recommending ongoing service propositions that may be irrelevant and unnecessary for some clients and, therefore, not fair value.

For many clients, the annual meeting and reappraisal of their situation is valued. But the situation might be rather more nuanced than the FCA’s rather black and white analysis.

Many clients need and want regular help – but perhaps not every year or even every other year. The continuing relationship is valuable for them but, in some years, it may be more valuable than in others and perhaps the level of fees should reflect the very variable level of work.

Would many clients be willing to pay high enough fees to cover the cost of restarting their relationship with an adviser every few years?

Some advisers have adjusted their fee scale to reflect the range of work they undertake in different years. In many years, they just react to a client questionnaire by sending out the required valuation plus a report stating that, as there has been little or no change in the client’s circumstances, the current investment plan remains suitable. In such years, a rather lower fee would seem appropriate.

But from time to time, things change – either a client’s personal circumstances or because of new taxes or investment opportunities – and a meeting is essential. When there’s a meeting and an adviser has to do some extra work, a higher fee is appropriate. And clients get what they pay for.

However, in the FCA’s view, some clients really don’t need any kind of ongoing relationship; they just need to be pointed in the right direction and then left to get on with it. Then, if circumstances change, they might come back to the adviser once again.

How many advisers in the currently limited population are now prepared to work on a transactional basis?

Two questions arise: Will clients like this approach? And how will the advisers approach it?

Clients will certainly like any change that brings down fees substantially – always assuming they notice the alteration. Keeping the ongoing relationship but adjusting the fees to the level of service each time might go down well with clients, as long as it doesn’t lead to large and unexpected fluctuations.

But having an on-off relationship with clients where the adviser has to start all over again (with new fact-finds and so on) after a long absence might be more problematic.

Would many clients be willing to pay high enough fees to cover the cost of restarting their relationship with an adviser every few years? It would also mean restarting the relationship would be the client’s initiative and they might not be aware of changes in tax, investment products or other issues and would therefore miss out.

And how many advisers in the currently limited population are now prepared to work on a transactional basis?

If the FCA and FOS are not aligned, various initiatives aimed at increasing access to advice may struggle to gain traction

The answer, presently, seems to be not many: 90% of new clients were placed in ongoing advice arrangements last year, according to the FCA. One-off, task-based advice is harder for firms to commercialise, and is therefore in shorter supply.

This dilemma is compounded by liability risks for advisers. If the FCA and the Financial Ombudsman Service (FOS) are not aligned, various initiatives aimed at increasing access to advice may struggle to gain traction.

So, it seems apt the advice guidance boundary is mentioned – albeit briefly – in the FCA letter. Redrawing the advice guidance boundary holds out great promise as a route towards looking after the finances of lower value investors, although there is scepticism about the commercial potential.

The current regulatory framework and its inherent risks have inhibited most advice firms from entering the market that has so far been almost exclusively served by direct-to-consumer platforms.

Catering for sporadic advice, targeted support or simplified advice would also prompt a seismic shift in the organisation of the sector. The constraints of the current supply of advisers, the available technology to them and the current organisational structures in firms would need to change. But if they could be surmounted, the opportunities could be huge.

Mariam Pourshoushtari is an analyst at Platforum