The financial advisory market is changing at high speed

It is undeniable that the financial advisory market is changing at a rapid pace.

The effect of technological and market forces is being felt now and in the next two to three years it will increase further.

A fragmented market

The consultancy market in the UK is fragmented with 89% of companies having less than five advisers. Many business owners have reached or are rapidly approaching retirement age. As a result, three out of five businesses are looking to sell.

The retail distribution review and lack of financial advisers in the UK (about 27,000 in 2020) has led businesses to move up the value chain. It is not profitable for companies to provide services to individuals whose value of investable assets is less than ‘A set’ (usually around £250,000).

Despite the pandemic, UK financial advisers have fared well as 95% report an increase or no loss in their client banks. However, things are about to change. Consulting firms of all sizes need to understand this shift and how they position their business. There is an evolution going on that is restructuring the market and it is going much faster than many think.

Consolidation has been happening for several years among consulting and platform companies in the market. Small consulting firms are now part of larger organizations that are building their capacity to maximize economies of scale. They use technology to improve efficiency, profitability and profitability, building a brand and reaching more people across the UK.

Barriers to market entry, in the form of regulatory constraints, higher qualification requirements and shrinking markups, have kept the consultancy market much smaller than it could be. Most consulting firms have been prevented from expanding their business due to a lack of investment capital.

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

So why so many moves in the market? Data from Alpha shows that currently the UK retail and wholesale market is worth £1.9 billion in assets under management. This amount is expected to reach £2.9 billion by 2025; 84% of which they expect to be notified.

Alpha attributes the drivers of this significant increase in savings and investments to strong macroeconomic tailwinds. An aging population with high investable wealth, DB to CD pension transfers, pension reform, government policy (to increase personal savings and investments) and the potential lack of guidance.

Royal London estimates that the lack of advice could represent a £185billion** opportunity, impacting 39 million people in the UK who do not have access to any form of career guidance or counselling.

The fact that private equity has shifted its focus to the financial advisory space is seen as a sign that the market has the potential to grow significantly. These companies are building both consolidator models and enabling businesses to take advantage of the latest technologies while growing into strategically sized and capable consulting firms and platforms.

Additionally, and unsurprisingly, the anticipated growth of the market and the opportunities opened up by consumer-led and human-assisted advice are increasing the competition in the market. Banks and building societies recognize the potential of hybrid advice that allows them to offer digital advice to their clientele, while attracting higher value clients into their advice flow.

Pension companies and life insurers use FCA-regulated third-party providers.

Along with technology to help consumers with, for example, retirement planning.

Technology is now a key enabler of the advisory process. The human-assisted, consumer-led consulting model is used to effectively deliver a personalized digital consulting journey. Guidance and 100% codified counseling may be fully aligned with the authorized counseling policy of the service provider, or partial or full counselling.

Using consumer-led, human-assisted advice; advisory firms can profitably serve low-value clients with little or no advisor involvement while providing quality service to their HNW clients.

Alpha FMC points out that the consulting market is undersized and inefficient. Intelligent automation allows consulting firms to take the brunt of the consulting process off the hook. This relieves advisors, paraplanners, and administrators of the costly and tedious burden of manual processing. Instead, they can focus on value-added services that will attract and provide quality service to financial advice clients.

Central to this is the FCA’s focus on consumer outcomes; the FCA’s Consumer Duty document and the ability of the financial advice market to reduce the advice gap by helping consumers better understand their financial situation and how they can improve their financial well-being.

Market evolution is well underway and deploying the right technology is a way for consulting firms to ensure they remain relevant in the face of these changes and the market.

* All data provided by Alpha Financial Markets Consulting

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

Mark Kiddell is Commercial Director at Wealth Wizards and Bradley Northrop is Director at Alpha FMC