Most advisers regularly receive enquiries from clients looking to capitalise on the attractive transfer values they are being offered from their defined benefit pension schemes. As legislation doesn't allow clients to do this themselves without advice, they are looking for advisers to assist them with their decisions. Pension freedoms have provided an opportunity for clients to access their pensions and shape their retirement income in different ways, which again has seen an increase in the demand for advice.
We are also faced with an ageing population, where people are living longer and as a result, their money needs to last them longer. More planning is needed for people in later life and to deal with issues like illness and care planning. This again is likely to see the demand for advice increase.
The greatest challenge that the profession faces over the coming years is having the capacity to serve customer demand, given that the number of advisers in the UK has been substantially diminishing over the last decade or so.
In the late 1980s, the advice industry was made up of banks, insurance companies, tied sales arms and independent advice firms. At that time, the total number of UK advisers exceeded 250,000, and served a large proportion of the general public. Of course, during this time, the industry faced its challenges and suffered a poor reputation, but on the whole it still managed to provide the public with a valuable service.
As the industry evolved over subsequent years, the number of advisers started to reduce. Then in the run-up to the Retail Distribution Review, numbers reduced even further. Increased regulation, increased costs and higher qualification levels were all cited at the time, however the ultimate issue is this has led to is the financial services industry’s inability to serve customers to the same level as it did before.
The total number of advisers in the UK is now around 23,500, less than 10 per cent of the overall number in the late 1980s.
The approach to advice has also changed substantially over this period. In the past, a more transactional advice environment and a lower regulatory burden allowed advisers more time to support clients. Post-RDR, this has changed. Most advisers are only serving a finite number of longer-term clients, who they provide an annual service to, meaning that overall the number of clients served per adviser is less than it was. When you couple the number of clients served per adviser with a fraction of the advisers than there used to be, we as a sector are now serving far less customers than we used to.
Now, there is a question of whether this trend will continue or not. The current average age of advisers is roughly 55, depending upon which data you look at. This means that by the rule of averages, half of the current adviser population will be over the state retirement age of 65 in 10 years’ time. If these advisers then choose to retire, in 10 years’ time we will be left with only around 12,000 advisers from our current pool, plus any more that join the profession during that period. Adding to that pool has to be a focus.
A lack of advisers is likely to push people towards making their own financial decisions, which we know from major studies can cause significant financial detriment and make them susceptible to scammers and fraudsters. This has already been acknowledged by the FCA and the Treasury with the work of the Financial Advice Markets Review attempting to address this.
With a dwindling number of available staff, advice firms who want to grow and expand are struggling to recruit. What is happening in some firms at the moment is that if a firm wants to recruit an experienced and qualified adviser, they are likely to have to offer a significantly higher pay package to incentivise them to move to their firm from their current firm, which then leaves a gap in the firm they leave. The risk is this then continues from firm to firm and although advisers may end up being paid more, these costs will inevitably need to be passed on to clients.
As a large proportion of advisers plan their exit from the profession, some may struggle to find a suitable buyer. Many firms looking to sell their business are less interested in the price they can get for their business and more interested in what sort of service their clients will be given going forward. The challenge will be that the fewer firms there are, the less options that selling firms have in finding that suitable buyer.
The solutions to address are really two-fold. We need to address the issue around adviser numbers and try to replenish numbers within the profession to meet consumer demand. We also need to look at alternative solutions to serve customers, who perhaps don’t need the full face-to-face advice services offered to them. Technology may go some way in helping to addres the advice gap, and the FCA 'sandbox' initiative allows robo-advice firms to test their products in the market under the regulator’s supervision.
Yet increasing adviser numbers remains a major issue, one which we have been trying to address for years but nobody seems to have cracked.
Adviser training and development was much more abundant in the past than it is today. Banks, insurers and tied sales operations all ran programmes which recruited advisers to the sector, teaching and coaching them in the skills required. Most of these entry points to the profession have now ceased and only a handful of programmes still exist for recruiting unqualified advisers. These exist within some major networks and also a small number of providers have recently created their own direct sales channels. These will help with increasing the number of advisers, but on a much lower scale than they helped in the past.
Of course, small advice firms can recruit and train their own staff, however there are some concerns and challenges that firms have identified around this potential route. Many firms simply don’t have the expertise to train their own staff to become fully competent advisers and don’t know where to start. The time and cost required are also often a challenge, especially where they have a concern that once they have put the cost and time into training, their trainee could end up leaving the firm and going elsewhere. The only real way to mitigate against this risk is treating their trainee so well that they don’t want to leave. It is also possible to provide incentives for the trainee once they have qualified, such as pay increases, clients or equity in the business.
The new apprenticeships regime could however be the best option we have had in years to replenish the profession with the next generation of advisers. An apprenticeship offers ‘on the job’ training with ‘off the job’ learning. On the job training is provided by the employer and off the job training provided through a training provider, such as ourselves, On completion, the apprentice would have received all the relevant knowledge, skills and behaviours to be a qualified adviser.
In my next article I'll look at the mechanics of apprenticeships, and where we are now.
By Tom Hegarty
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