The past few years have shown that aiming to predict trends and outcomes is an impossible feat. However, as we look back on the wealth management industry over the course of 2022, and in the context of forecasted 5.7%1 CAGR over the next 5 years, there are observations and insights that point to 4 “forces” that we believe will notably shape the UK financial advice industry in 2023.
Continued Consolidation
As some 12% of Advisers look to exit or sell their businesses, acquisitions will continue to play a key part in the succession planning for many advice firms.
We've seen private equity-backed consolidation in the form of Kingswood (Pollen Street Capital), Skerritts (Sovereign Capital Partners), and others where the buy-and-build approach has been taken with the aim of increasing assets under management, improving financial performance, and enhancing regional coverage. In other parts of the market, we have seen technology-enabled businesses like Schroders' Benchmark Capital strengthening their offering to both customers and Advisers by acquiring advice businesses.
It is estimated2 that the value of asset transfer through consolidation over the past 10 years is circa £55bn, with the implementation of Retail Distribution Review (RDR) leading many Advisers to look at opportunities to exit. The drivers for acquisition have evolved over the decade, with greater focus now on financial performance and coverage, rather than on regulatory demand.
While many will still see opportunities to create value through consolidation, with market conditions as they are and deal flow across all industries looking slower, consolidation is unlikely to continue at the same rate as previous years. This potentially leaves a gap for those Advisers now in the final push to retirement.
Outlook: Consolidation across the industry will continue, albeit at a potentially slower rate than in 2022. There's a case for increasing focus on consolidation across the acquired assets to deliver on the case for economies of scale, reducing costs, and ultimately providing better service and greater value to customers who continue to seek financial advice.
Adviser & Client Experience: Digital & Data
The wealth management sector continues to lag the rest of the financial services industry when it comes to embedding digital platforms and leveraging data – particularly with respect to the Adviser and client experience. The pandemic forced the industry to adopt tools such as DocuSign to “survive” in the new ways of working, but there hasn't been significant innovation and digital adoption across the sector in 2022.
While 65%3 of advice firms state that their technology budget will increase over the coming 3 years, the focus will need to be on developing clear strategies around how client data will be managed and leveraged to retain existing clients and designing digital-led customer journeys to simplify the client onboarding process. With only 35%4 of time in advice businesses currently allocated to clients, embedding technology across all aspects of the advice business will be critical. There is an opportunity for advice businesses to review their ecosystem of partners, particularly with FinTechs, who are able to provide productivity and service enhancing wealth-tech platforms.
The Pensions Dashboard Programme, with an initial deadline of 31 October 2023, will also be a driver for greater focus on both the Adviser and client experience. The increased data access and transparency is intended to address the estimated £19bn “lost” in forgotten UK pensions.
Outlook: There will be increased investment in the technology capabilities within advice firms – with a much-needed increased focus on cyber security, however the adoption and embedding of digital capabilities will be slower than required. Client expectations will continue to increase as they look at other industries in terms of the client experience and journey.
Consumer Duty – RDR part 2?
Many in the industry are comparing the FCA's new Consumer Duty focusing on enhanced consumer protection with RDR which came into force in 2012. The impact of the RDR on the advice landscape was significant; with data showing a reduction of 20%5 in the number of Advisers immediately after RDR came into effect, as many Financial Advisers chose not to attain the required Level 4 qualifications.
It is not expected that the Consumer Duty will lead to such significant changes in financial planning and advice, however the new regulation is far reaching, and many advice firms have a long way in terms of developing and embedding cost-effective frameworks and reporting to “evidence” their compliance with the Consumer Duty to the FCA.
Outlook: Our two papers focus on the importance of data in meeting the FCA's requirements, and an overview of what is really changing with the Consumer Duty and its impact in the insurance, asset and wealth management sectors. For wealth management firms, the “price and value” outcome (one of four in the Consumer Duty) will likely shine a spotlight on the already highly-discussed topic of fees for financial advice.
Talent Pipeline (or lack thereof)
Of the circa 31,000 financial advisers (including mortgage advisers) in the UK, more than 74% of them are 40 years old and over, and only 8% are less than 30 years old2. Add to this that FCA data shows only 16% of financial advisers in the UK are female. In isolation, these numbers are concerning, but when we look at the increasing demand for financial advice (particularly in turbulent times) and the changes in demographic with more wealth being owned by women, it's clear to see that the talent pipeline in financial advice is lacking.
While some of the larger wealth managers are investing significantly in academy-type programmes, supporting new Advisers into the industry, a lot more needs to be done to attract and retain a more diverse pool.
With an increasing focus on ESG both by regulators and investors, advice firms will need to do more to demonstrate their commitment to diversity and inclusion – not just words, but tangible action to closing the talent gap.
Outlook: Addressing the talent pipeline should be treated as a priority for industry leaders and while we expect increased focus on the topic, tangible progress will disappointingly be much slower than required. This presents a significant societal challenge; with the existing gap in financial literacy, the current cost-of-living crisis, and a growing group of soon-to-be retirees, the talent agenda is by no means a “nice to have”.
Footnotes
1. IBIS World – Financial Advisers in the UK, 2022
2. FT Adviser – How adviser M&A deals have changed in 10 years of RDR, Ten years on: has RDR been a success?
3. ClearView Financial Media, SS&C Advent, WealthBriefing – Tech & Ops Trends in Wealth Management, 2022
4. Model Office – Cost of Compliance Survey 2022
5. Financial Conduct Authority (FCA)
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