Insight: Financial Advisors Face Survival Challenges Amid New Compensation Demands

By Published On: 31 May 2024
under pressure

The financial advice sector is currently under immense pressure as it adjusts to the unforeseen requirements of consumer duty. Initially, the spotlight was on major firms like St. James’s Place, but now these challenges have spread across the industry.

Annual Servicing Issues

A common complaint is the difficulty of servicing clients while having to provide proof of annual meetings and check-ins. The pre-digital era, dominated by paper diaries and manual processes, was not conducive to efficient data management.

Annual Reviews and Neglect of Service Users

The key question is whether annual reviews actually occurred and, if so, where the records are kept.

According to Citywire data, 85% to 90% of advised clients likely had annual reviews, but this varies greatly between firms. Sales-oriented firms and those without central control struggle the most. Neglected clients are often those with smaller investments, particularly under £100,000. This issue has worsened with many advisors retiring or selling their client books recently. New advisers often find servicing these smaller, less familiar clients less rewarding, leading to poor outcomes for many.

Effect on the Consolidators’ Financials

Consolidators and private equity-backed firms are primarily concerned with the bottom line. If only 85% of clients have documented reviews, this impacts profitability. High interest rates and the need to refinance older deals exacerbate the issue. Future regulatory actions add uncertainty and complicate due diligence processes, while rising insurance and claims costs further strain financial resources.

Market Corrections and Risk in Financial Planning

The current high level of the FTSE Index masks potential pitfalls. A 10% market correction could be catastrophic for financial planners, especially with rising costs and shrinking margins.

Recycling Risky Clients

Eighteen years after Ned Cazalet’s report “Polly Put The Kettle On,” the focus has shifted to recycled customers. Traditional wealth managers are expected to avoid high-risk clients, leaving them to new hybrid advice models. This shift could lead to significant changes in client management strategies.

Consumer Responsibility and the Role of FCA

The FCA’s consumer duty aims to correct long-standing industry practices that often prioritised intermediaries over customers. Two critical issues highlight this: a surprising number of portfolio managers and stockbrokers reported no vulnerable customers, and high satisfaction levels among current clients often mask underlying problems. Our research shows that only 49% of recently exited clients were very satisfied, suggesting firms may not be asking the right questions or using data effectively.

Balancing Change and Stability

The FCA faces a delicate balance between pushing for progress and managing potential failures and consolidations. Rapid changes and constant data requests can overwhelm firms. While targeting major firms for compliance might be imminent, the industry as a whole is unlikely to withstand a large-scale compensation exercise similar to PPI.

The challenge for the FCA is to manage this transition without causing widespread failure while addressing industry misconduct effectively. Claims Against Financial Advisers are key factors in navigating this complex landscape.

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Written by : HTLEGAL

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