Expert: Phil Middleton, Schroders
Facilitator: Laura Cava cuiti
As the implications of RDR continue to reverberate, adviser business models have needed to adapt and change rather dramatically. As such, there has been a substantial shift towards outsourcing their investment offering.
Headlines and key questions
- The session considered the numbers behind this trend and the opportunities it holds for wealth managers
- Roundtable participants discussed the shift in product trends following the introduction of structured fees for financial advisers and the products that advisers now want from wealth managers
Folliwing the Retail Distribution Review, the tectonic plates of advice and investments shifted radically. The interest in upgrading the client base to a higher minimum asset level is intense. Adviser business models more specifically have been transforming at a rapid pace, and the industry has witnessed a substantial shift towards outsourcing investment offerings.
The intermediary market size is growing and has hit the £1.5 trillion figure, continuing on a 6% growth rate. Data shows that vertically integrated firms are one of the fastest growing segments within this sector, and other IFAs are underperforming. What does this mean? In a nutshell, the industry is facing a huge period of change.
Slowly but surely, the reality of RDR is sinking in amongst the independent wealth community. Even the most stoic of IFAs is facing up to the fact that increasing amounts of regulation is set to hit the industry and independent firms. However, the market is expected to continue growing at a c.6% CAGR until 2020 due to a mixture of macroeconomic and regulatory factors.
In 2017, data shows that minimum asset sizes for new clients have been reduced – but advisers implementing minimum asset levels have increased. Increased client segmentation and robo-advice channels have played a role in this. Participants in the roundtable expressed concern that this may widen the already considerable advice gap as clients seek a cheaper alternative solution for their investment requirements.
In turn, fees are creeping up and a growing proportion of advisers are now charging clients a percentage of assets under management. Portfolio outsourcing continues to grow, with more advisers outsourcing more of their assets.
Participants of the roundtable opined that they have been seeing less people using traditional multi-managers and multi-asset funds. There is much more of a focus on outcome-oriented products. The number of financial advisers shrank rapidly following the announcement and implementation of RDR, although this has now since stabilised.
But like most things, the changing trends of the IFA world are not occurring in a vacuum. The impact of political and social change has had a dramatic effect on the peaks and troughs for this advisory community.
Brexit led several wealthy individuals take money out of the UK, and redistribute into European markets. Whilst UK property had been booming in recent years, the industry is seeing a lot more diversification since the referendum as investors seek to minimise their risk exposure.
And alongside this wavering uncertainty in the success of British markets, comes an increasing interest in passive investing. As more and more firms are under pressure to reduce costs, roundtable participants stated they are seeing many modern portfolio services begin to use passive investments whereas previously they had used active vehicles.
Because clients are much more aware of the total expense ratios than they used to be, UK investors are beginning to replicate American passive investment trends. And as a result of this, charging needs to be very transparent and appropriate for each and every client:
“They will pay, as long as they know exactly what you are doing and they are happy with it.”
For those clients who do want to continue using passive investing however, the explanation for this is most likely to be echoing the digital opportunities offered through robo-advice and their cheaper associated costs.
Brexit has set the scene for the changing IFA community this year, causing some concerns and rifts in the shifting marketplace. As discussed in the roundtable, participants are seeing increasing numbers of advisers charging clients a percentage of assets under management. Portfolio outsourcing also continues to grow, with more advisers outsourcing more of their assets – all types of DAM continue to benefit as a result.
There has been continued client segmentation and greater minimum asset requirements which may widen the advice gap, and robo-advice has undoubtedly played a part in this. However, the majority of advisers see new technology as an opportunity.
The impact of RDR is interpreted relatively positively and demand for passives is continuing at a steady pace, but allocation weightings remain relatively low.
All in all, participants agreed that to survive, the IFA community needs to remain on top of these dominant changes and fluctuating trends, demonstrating flexibility and adaptability.