Clients with lower values to invest are often of small interest to advise firms. But they shouldn’t be and technology now means they don’t need to be, argues Daniel Giddings, head of business development UK at Moneyfarm
Everyone that knows me is aware that I love watching The Great British Bake-Off, but perhaps I’ve been watching too many reruns with the kids recently, as the phrase ‘you can’t have your cake and eat it’ has started to irk me. This has been exacerbated as I have been hearing it used in the advice sector when it comes to the dilemma of how to deal with small clients. The message is that you can’t have the best of both worlds. But I beg to differ.
The Devil’s in the detail
Advisers don’t have an easy life and this has been compounded with markets being volatile, the time and cost needed to provide sound financial advice has meant that many advice firms can no longer justify the time needed to serve those clients with a portfolio valued at less than £50k. Thresholds vary across the sector, but I’ve heard of minimums ranging from £50k to £700k. It’s fair to say that it has now got to a point where it’s not unreasonable to ask if you can serve smaller clients and still be profitable. Going back to the baking analogy (because why not) it seems that at the moment you really can’t have your cake and eat it.
The pursuit of the magic number
Research from SimplyBiz back in 2019, revealed that the hypothetical breakeven number for delivering ongoing advice is £85,800. This research looked at the total time taken to deliver ongoing advice covering everything from setting up the appointment, carrying out the appointment, research and ensuring product suitability etc. The average time taken was 5.72 hours. If the average hourly rate is £150, then 5.72 x £150 = £858. Now, if you charge ongoing advice as a percentage, SimplyBiz assumed 1%, then you need £85,800 to generate that £858 (£85,800 x 1% = £858). A lower ongoing % fee would mean a higher threshold. So, if you’re looking after any customers with assets lower than £85,800 then you might be losing money on those cases.
Some advisers take the view that fees from larger cases can subsidise smaller cases. Others take the view that thinking beyond wealth can mean the smaller wealth cases can still bring in attractive fee income from other products like protection and mortgages. But advisers now need to consider Consumer Duty and the impact of that and the transparency that regulation dictates.
According to data from the lang cat, advised assets on platforms in the UK was £514b AUA in March 2021. If we assume that around 15% of adviser assets are below £100k, then we’re talking about £77bn AUA that is not commercially viable.
Orphan clients
Then there’s the contentious issue of orphan clients. It is crazy to think that some customers may still be paying a fee for ongoing advice when none has taken place. Of course, the right advice may well be to stay put, but an orphan client could exist as the adviser has since died or moved on, but fees are still being collected. That simply isn’t right.
Indeed, the FCA’s Investment Platforms Market Study, published in 2019, found there were about 400k orphaned clients, holding more than £10b of assets on platforms. So being conservative, there is £87b in AUA that is either below £100k in the portfolio or is an orphan client. As an industry, surely, we can manage these cases more effectively for both the adviser and the end client?
Is technology the solution?
Coronavirus certainly accelerated the inevitable adoption of digital tools. For financial advice firms, this has typically meant video calls, e-signatures and maybe the introduction of a client portal. But ongoing advice for cases below £100k just isn’t typically commercially viable.
The answer could be offering smaller clients a fully digital wealth solution. A service that means you can delight those customers, still earn a fee from them, and yet dedicate most of your time to larger cases to help grow your business. Finally, a solution where you can have your cake and eat it.
