Tim Sargisson: Is financial planning facing a succession crisis?

Advisers may be currently retiring faster than they are being replaced but, writes Tim Sargisson, could the real issue for the future of the profession relate more to profitability than succession planning?

The start of another year and, straight off the bat, the opportunity to attend The Investment Network conference and to share some of the work Sandringham is doing on succession planning and retirement.

Our need to focus on this area is the result of three shifts we are seeing in our profession. First, ageing advisers who want to retire and to realise a value from the client relationships and assets under influence. Second, a real need to attract and develop a younger generation of advisers who are looking to enter the financial planning profession and build a career.

And, finally, the fact that fewer of our existing advisers now consider moving firms, with as few as 50 CF30s a month moving firms out of a total adviser population of some 26,300. This third point recognises that most firms provide a strong solution for established advisers.

Industry trade body Libertatem has tried to put the number of potential retirees into context. The latest Heath report surveyed 249 adviser firms, representing 865 advisers – revealing 7,000 advisers are set to retire within the next five years, with 1,650 are ready to log off immediately. Only 18,000 advisers are expected to still be working in 10 years’ time, according to the report.

There is no surprise in any of this. We are constantly being reminded the average age of an adviser is somewhere north of 56 and the battering of the advice sector following one challenge after another has left many dreaming of a different life.

We must also recognise there is a flourishing consolidation industry. Already this month, AFH has agreed to buy Hayburn Rock Group – purportedly on a price/earnings ratio of between 2.25 and 8.75x profit. Paradoxically, however, while numbers of advisers are looking to retire in 2018, Nucleus tell us that most advisers have no interest in selling their firm to a large consolidator.

The figures from a survey of around 200 advisers canvassed by the platform in 2018 found just 4% would sell up to a large consolidator – down from 13% in 2017. Advisers were seemingly ‘put off’ by stories of acquisitions that have gone wrong and the fear of damaging client relationships.

The retiring IFA wants two things – money, yes, but also comfort their clients will be looked after when they choose to exit the profession. The option for some advisers is to ‘buddy up’ with a fellow IFA, because they fear the years of trust and loyalty built with these clients could be eroded quickly by a sale to a large consolidator. Many are discovering a ‘sale’ to a like-minded firm is the most likely way to ensure a consistent experience for clients – although this approach still provokes considerable uncertainty for the vendor.

Let’s ask ourselves, however, whether this concern over retiring IFAs matters? As things stand the answer seems obvious. Approximately £275bn of assets are being administered by advisers for private clients. The Heath report makes the point that, unless these retiring advisers are replaced by new recruits, the number of consumers accessing advice could be under one million in 10 years’ time.

The real issue 

For Sandringham the real issue in this debate remains profitability not retirement. Total profit before tax in 2017 for retail intermediary firms is £699m. In 2010 it was £702m. During this time, turnover has increased from £3.4bn to £4.4bn – that is, a 30% increase while profits have flatlined. The number of advisers has also remained static at around the 27,000 while each adviser on average contributes about £27,000 of profit per firm.

This is too low and the conclusion is that providing advice remains too expensive. A key question then is whether face-to-face advice for millions of  clients remains the best way to deliver advice. Customer relationships and customer knowledge are an adviser’s greatest asset. Going forward, however, client-facing technology will play an increasingly important role. The firms and advisers who succeed will be the ones who are able to combine great technology with remaining customer-centric.

Published on 22nd January