The financial advice market is evolving at a rapid pace.

‍A fragmented market

The advice market in the UK is fragmented as 89% of firms have less than five advisers.  Many business owners are at or are rapidly approaching retirement age. As a result, three in five firms are looking to sell.

The Retail Distribution Review and a lack of financial advisers in the UK (around 27,000 in 2020) has resulted in firms moving up the value chain. It is not profitable for firms to provide service for individuals with sub ‘A set’ value of investable assets (typically round £250,000).

Despite the pandemic, UK financial advisers have done well from this as 95% report of an increase or no loss in their client banks. Nevertheless, things are about to change. Advice firms of all sizes need to understand this change and how they’re positioning their business. There is an evolution under way that is restructuring the market and it is doing so far faster than many may realise.

Consolidation continues at pace

Consolidation has been happening for several years amongst both advice and platform businesses in the market. Small advice firms are now part of larger organisations that are building their capability to maximise economies of scale. They’re using technology to improve efficiency, cost effectiveness and profitability – building a brand and reaching more people around the UK.

Barriers to entry into the market in the form of regulatory burden, higher qualification requirements and decreasing margins, have kept the advice market much smaller than it could be.  Most advice firms have been prevented from scaling their businesses due to a lack of investment capital.

Alpha FMC believes consolidation of advice firms will continue to accelerate in the coming years, including larger advice firm consolidation.

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Huge opportunity for advice and wealth management firms

So why so much movement in the market? Data from Alpha shows that currently, the UK retail and wholesale market accounts for £1.9tn AUM. This is expected to rise to £2.9tn by 2025; 84% of which they expect will be advised.

Alpha attributes the drivers in this significant uplift in savings and investments to some strong macro-economic tailwinds. An ageing population with high investable wealth, DB to DC pensions transfers, pension reform, government policy (to increase personal savings and investments) and the potential advice gap.

Royal London estimates that the advice gap could be a £185bn** opportunity, impacting 39m people in the UK who don’t access any form of professional guidance or advice.

The fact that private equity has shifted its attention to the financial advice space, is being seen as a sign that the market has the potential to grow significantly. These companies are both building consolidator models and enabling firms to take advantage of the latest technology whilst also growing into strategically sized and capable advice businesses and platforms.

Intelligent automation will enhance advice provision

In addition, and not surprisingly, the anticipated growth in the market and the opportunities opened by consumer-led and human-assisted advice is increasing competition in the marketplace. Banks and building societies are recognising the potential hybrid advice gives them to offer digital advice to their customer base, whilst also attracting higher value customers into their advice stream.

Pension companies and life assurers are using third party, FCA regulated vendors. Alongside technology to assist consumers with for example, retirement planning.

Technology is now a crucial enabler in the advice process. The consumer-led, human-assisted advice model is being used to effectively offer a personalised digital advice journey. There is the option for guidance and 100% codified advice to be fully aligned to the authorised advice policy of the service provider, or partial or fully-fledged advice.

By using consumer-led, human-assisted advice; advice firms can profitably serve lower value clients, with little or no intervention from an adviser whilst still providing quality service to their HNW clients.

Alpha FMC points to the advice market being sub-scale and inefficient. Intelligent automation is enabling advice firms to take the heavy lifting out of the advice process. This relieves advisers, paraplanners and administrators of the cost-inefficient and tiresome burden of manual processing. They can instead focus on the value-added services that will attract and deliver quality service to financial advice clients.

At the centre of this is the FCA’s focus on consumer outcomes; the FCA’s Consumer Duty paper and the ability of the financial advice market to impact the advice gap by helping consumers to better understand their financial situation and how they can improve their financial wellbeing.

Market change is well underway and deploying the right technology is a means for advice firms to ensure they stay relevant to those changes and the market.

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* All data provided by Alpha Financial Markets Consulting

** Royal London, Exploring the advice gap, April 2021

Mark Kiddell is chief commercial officer is Wealth Wizards and Bradley Northrop is director at Alpha FMC

This article first appeared in Money Marketing on 11th August 2022.

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