RESEARCH PAPER 2020

IN ASSOCIATION WITH:

RESEARCH PAPER 2020Future of Advice - Beneath & Beyond

1. Background & objectives ............................................ 3 COVID-19 ...................................................................................................3 Sponsors.......................................................................................................3 External comments ................................................................................3 Research exercises .................................................................................4

2. Executive summary ..................................................... 6

3. The impact of COVID-19 on the advice and distribution sector ....................................................... 8

COVID-19 impact - positives for adviser businesses .........8 COVID-19 impact - negatives for adviser businesses ........9 COVID-19 impact - looking forward........................................10

4. Current status - the advice market 2020............... 11 Adviser concerns ..................................................................................11

Overview of key factors ..................................................................12 Adviser numbers and potential remedies ..............................13 Creating cost efficiencies within adviser businesses .........14

Adviser M&A activity predictions................................................15 Adviser competition? .........................................................................16

5. Thefinancialservicesclientoftodayand tomorrow ................................................................... 17

Overview ..................................................................................................17 Existing adviser relationships ..........................................................18

Discussing finances ..............................................................................18 Benefits of advice .................................................................................19

Obstacles for engaging with advice - why have you not sought out advice? ...............................................................................20

Do you regret not seeking financial advice over any major financial decisions? ................................................20

What might encourage you to engage with advice?........21 Payment for advice ..............................................................................21 In what situations would you consider paying

for the services of a financial adviser? ..............................21 How would you prefer to pay for financial advice? ....22 How would you mainly prefer to work with a

financial adviser? ....................................................................................22

6. Drivers of change ...................................................... 23 Immediate impact drivers ................................................................23 Medium-term drivers .......................................................................24 Longer-term drivers ............................................................................24 ESG .............................................................................................................25

7. The future shape of the sector ................................ 26 8. Keyadvicemarketplayersnowandinthefuture .. 27 9. Keyprovidermarketplayersnowandinthe

future ........................................................................... 28 Provider/operator M&A outlook ................................................28 Outlook for financial services providers/operators .........29 Top selection/retention criteria for providers/operators .30

CONTENTS

RESEARCH PAPER 2020: FUTURE OF ADVICE - BENEATH & BEYOND

AKG has made every effort to ensure the accuracy of the content of this paper, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion, as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide, explicitly or implicitly, through this paper and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary service.

Third party trademarks are used with the permission of their respective owners.

BACKGROUND & OBJECTIVESIntermediary distribution is the lifeblood of the vast majority of financial services companies assessed by AKG across our four peer sectors – Provider; Offshore; Platform; DFM.

A key part of AKG’s work therefore, in assessing the operational strength and sustainability of these companies, involves close monitoring of the temperature and due consideration of the likely future shape of the intermediary distribution market.

All parties with a stake in proceedings here need to target strong and sustainable business models – manufacturer and distributor/intermediary – and so a crucial element of this is the requirement to identify and seek to understand market dynamics.

AKG’s overarching objective therefore was to produce a practical paper which looks at key factors, drivers for change, likely shape of the market and to establish the main advice/distribution challenges and opportunities for intermediary businesses, manufacturers and other relevant industry stakeholders, primarily over the next two to three years. But to flag longer-term considerations as well.

AKG has carried out three separate but complementary market research exercises, with both adviser and consumer audiences, to underpin the delivery of this research paper. Associated research findings are therefore referenced throughout the paper.

Finally, through the research and its findings, AKG also wanted to provide a platform for ongoing industry discussion and debate.

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SPONSORS EXTERNAL COMMENTS

This AKG research project/paper is sponsored by:

Canada Life; Charles Stanley; Fidelity FundsNetwork; Intelliflo

AKG would like to extend its thanks to the sponsors for enabling the facilitation of this research project and the publication of the resulting paper.

Contextual comments from key representatives at each of the sponsors are also included within this paper.

AKG has also sought contextual comment for inclusion from The Personal Finance Society (PFS).

As AKG embarked on its project work worrying news of COVID-19 and its horrible impact on the UK population was emerging and developing on a daily basis.

However, rather than derail the project, AKG and the sponsors wanted to ensure that the work was able to capture crucial COVID-19 related sentiment and so ensured that the briefs for each of the three research exercises were revised accordingly before going into the field.

This approach has therefore, particularly from an adviser perspective, enabled the paper to explore the impact of COVID-19 on working practices.

COVID-19

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An outline of the approach taken for the three market research exercises carried out by AKG to inform this research paper is provided below. The paper is underpinned by the findings from each of these market research exercises.

1.

RESEARCH EXERCISES

Adviserqualitative

A series of 20 confidential telephone interviews with key stakeholders in a range of intermediary firms were conducted between 17 April and 14 May 2020. These qualitative interviews were carried out on AKG’s behalf by Frank Fletcher, Widewater Consulting. Interviews typically ran to 25-30 minutes and followed a discussion framework that covered the following subject areas:

• (About the respondents and their businesses)• The impact of COVID-19 on the advice and distribution sector• The current status of the advice and distribution sector• The financial services client of today and tomorrow• Drivers of change in the market• The future shape of the sector• Key market players now and in the future.

This is also the running order that has been adopted for the paper itself in terms of framework.

The advice, guidance and distribution sector is diverse and currently fragmented (as further underlined through this research exercise). This fact was recognised by AKG when targeting the universe of interview participants along with the fact that, within the various participant firms, a range of different functions may be involved in formulating views and implementing plans for future development.

To achieve a good blend of perspectives for this paper 20 interviews were therefore undertaken in order to gain as wide a range of views as possible. The split of interviews was as follows (also acknowledging the possibility that some firms might consider themselves as crossing definitions or operating in multiple disciplines here):

• 4 interviews with networks/service providers • 4 interviews with consolidators/aggregators, developing scale through acquisition• 4 interviews with vertical integrators/disruptors• 4 interviews with holistic financial planners, using a range of tools to advise individuals and families on a cradle to grave basis• 4 interviews with more mainstream financial advisers at the client-facing level

Actual participants, especially for the larger firms, include CEOs and other directors involved in strategy development, heads of marketing and heads of compliance, alongside a number of client-facing advisers.

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2. 3.Consumer quantitative

An online survey of 1,041 consumers was carried out on 15/16 April 2020. This was done on AKG’s behalf by Consumer Intelligence. The line of questioning sought to ascertain perspective on a range of themes, including:

• Have you ever discussed your financial planning with family and friends?• In the past five years have you sought advice on your financial planning from an adviser?• If you have not consulted a financial adviser in the past five years, why is this?• What would make you more likely you to seek financial advice?• In what situations would you consider paying for the services of a financial adviser?• How would you mainly prefer to work with a financial adviser?• How would you prefer to pay for financial advice?• What do you value about your relationship with your adviser/firm?

Adviser quantitative

An online survey of 100 advisers was carried out during March/April 2020. This research was done on AKG’s behalf by PollRight, the in-house research team at Citigate Dewe Rogerson.

Questions posed in the adviser survey covered a range of themes, including:

• Identification of external issues/matters which give advisers most cause for concern in relation to ongoing operation of their business;

• Establishing areas of development within adviser businesses which have been or could be done to create required time/cost efficiencies;

• Predictions on M&A activity for both adviser firms and providers/operators; outlook for adviser numbers and looking at what can be done to attract new advisers into the industry;

• Identification of the types of provider/operator which might benefit most from opportunities to service advisers/clients moving forward.

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EXECUTIVE SUMMARYReplenishingtheranks(ofadvisers) - The age profile of financial advisers is inescapable. Whilst not necessarily an immediate problem it is obvious that the industry must continue to work towards the development of plans and initiatives which target the introduction of new blood into the advice ranks. Whether this be for first-timers, second-jobbers or otherwise.

Communicatingthebenefitsoffinancialadvice - The industry needs to do a better job of communicating the benefits and value of financial advice. Those consumers with an existing advised relationship in place selected peace of mind over financial decisions, access to ongoing support and ideas on finances/investments as the top three benefits of their engagement with advice. The industry can use this sentiment to support key marketing messaging.

Servicingbabyboomers(throughtheirretirementandlaterlife)istheonlygameintown - For now the most obvious, enduring and profitable advised opportunity for servicing clients remains tied intrinsically to servicing the various retirement life stages of the baby boomers. And this is equally applicable to advisers and providers with both needing to continue to adapt and develop propositions to ride the wave of those in and approaching retirement.

Replenishingtheranks(ofadvisedclients) - But once the baby boomer wave has subsided more worries will emerge around how best to generate new client acquisition opportunities. While more creative new business generation strategies need to be developed in the long-term, over the short to mid-term advisers need to work harder at tapping into intergenerational and multi-generational advice opportunities by further extending existing client relationships.

Drivenbymajorlifeevents - A decent proportion of consumers indicate that major life events, such as buying a house or retirement, would make them more likely to seek financial advice. This needs to be acknowledged by those targeting new client acquisition opportunities. For many of us as consumers, waking up and seeking financial advice or financial products, is simply not a daily occurrence, rather behaviour that is likely to be driven by a major life event or circumstance.

Onesizedoesn’tfitall (clients) - There is most definitely an opportunity for the evolution of different advice service models (within the same organisation or in terms of separate but complementary types of adviser business). Requirements by age or other characteristics/grouping in this as part of the continued segmentation work that is required.

Flexible servicing model opportunities - The real winners may be those firms (whether traditional advisory firms, new entrants, disruptors, consolidators or vertically integrated) who can profitably put people and technology in the right places to ensure they have a spread of demographically different clients with a coherent, multi-channel, multi-disciplinary proposition that can flow from product advice (transactional) to full planning advice when needed.

Palatableadvicefeesandshape - While some consumers will remain reluctant to pay a fee for financial advice, the industry needs to continue to consider and discuss affordability of advice. It does feel as though there is an opportunity to target competitively priced transactional advice options at the lower to mid-end of the market. All the while acknowledging that successful adviser businesses need to be compliant, profitable and viable. There may potentially be further lessons that can be learnt from pricing models used by other professions such as accountants and solicitors.

Trust and transparency - While some progress has been made in this regard the industry needs to continue to work on improving levels of trust and on improving transparency levels. This applies to both the distributor and manufacturer side of the fence. Efforts on transparency, around costs, performance, and the value of the service provided need to be focused on tangible metrics and explanations that consumers can easily grasp and evaluate.

COVID-19,anaccelerant forchange - It has helped to accelerate the natural evolution of advice business into a revolution; some changes that may have taken several years to materialise have been condensed into a few short months. The pandemic has also exacerbated stark contrasts between more old world businesses (both advisers and providers) that have struggled to cope with the sudden need to adapt and new world firms with strong technology and communications bases.

COVID-19,impactonnewbusinesspipeline - While in many cases the servicing of existing clients has proven to be more efficient and cost-effective for firms when done remotely through mechanisms such as video calls, the acquisition of new business has been reported as more challenging. Wider new business/client acquisition concerns may be prolonged for some businesses beyond the personal referrals that are made by existing clients.

COVID-19,howtobalancetheservicemodelmovingforward? - The decision on how best to operate and service clients post-COVID-19 will be a balancing act, both in terms of office versus home working patterns and in terms of face-to-face versus remote servicing of clients.

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Requirementtocreatetime/costefficienciesinthebusiness - It was interesting to see that respondents felt they had or could make better use of back office capability and platform capability. It would certainly seem to make sense to focus on maximising the benefits of propositions, services and tools which are already being used (and paid for) within intermediary businesses. Some survey respondents felt that the introduction of video conferencing for client discussions had or could create business efficiencies. While some may already have been trialling video conferencing for client discussions there is no doubt that COVID-19 lockdown restrictions have taken this servicing opportunity to the next level.

M&A activity set to continue apace - M&A activity was predicted to grow over the next 2 to 3 years in both the intermediary and provider markets. This activity will therefore continue to have an impact on market behaviour and more needs to be understood about the associated ramifications for market participants.

Outlook for financial services providers/operators - Apparently positive news here for platform operators initially with half of those surveyed by AKG feeling that these would benefit most from opportunities to service advisers and their clients over the next two to three years, while one-quarter felt that DFMs would benefit the most. Interesting also to see support from around one-third for both client portals and lifetime cashflow modelling software, underlining the wide range of propositions and tools that intermediary firms require to deliver their advice services to clients these days.

Future shape of advised sector; beneath and beyond - On the basis of a 3-year time horizon, the irresistible conclusion from this research is that the participants in the financial advice market will look remarkably similar to those of 2020. Despite the ‘revolution’ mentioned earlier, the overall shape of the market may remain relatively unchanged. Beneath the surface, however, change is afoot and hence relative importance, impact and further future potential may well be different and most definitely needs to be considered and discussed further.

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THE IMPACT OF COVID-19 ON THE ADVICE AND DISTRIBUTION SECTOR


Adviser quant stat - Given the timing of AKG’s research, when asked to confirm which external issues are giving survey respondents most cause for concern relating to the ongoing operation of their adviser business, COVID-19 impact was unsurprisingly the leading issue (76%).

It was also inevitable that AKG would further explore COVID-19 in the adviser interviews. From these discussions with intermediary firms there can be no doubt that COVID-19 has been and will continue to be a contributory factor in changing key facets of financial advice.

Whilst some of the adjustments that firms have been required to make may be reversed when conditions permit, other changes will likely stick – not least because they have been pushing in some of the directions in which the industry needed to explore in future anyway.

COVID-19 has therefore acted as an accelerant for the evolution of some aspects of advice and distribution in three short months.

“Major changes were coming to the market over the next 5-10 years, but they have been compressed into 2-3 months. Home working, less face-to-face and travel time, greater technological progress in

running businesses, acceleration of change in areas like wet signatures. Remarkable.”

Consolidator/Aggregator

“Our data shows that the COVID-19 crisis has significantly accelerated the use of technology. Between February and April 2020, logins to Intelliflo’s Personal Finance Portal, which allows advisers and clients

to interact with each other via a secure online hub, increased more than three times and Intelliflo’s digital signature functionality DocuSign experienced an uplift of more than ten times. There’s no doubt that this will shape the future for advisers and their clients and deliver greater efficiencies for both as a

result.”

NickEatock,CEO,Intelliflo

Most of the consequences for the industry are seen in a positive light by interviewees:

• Home working has been facilitated as far as possible and become routine, actually leading to increased productivity for many firms.

• This effective home working has been based on good, strong and fully-integrated technology allowing individuals and firms to function effectively.

• Client video conferencing and calls are replacing expensive face-to-face contact, again as routine, and some firms commented that this is actually leading to better and more frequent client communications.

• As a result of these revised operational models, time and travel costs have been dramatically reduced.

• Servicing existing clients has therefore been easier for many and become more efficient.• Senior executives interviewed for this research generally commented that the management of

staff has been easier in the new circumstances and remote operating environment.

COVID-19 IMPACT – POSITIVES FOR ADVISER BUSINESSES

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But there are however some negatives emerging from the interviews, including:

• The biggest issue most commonly reported has been maintaining the flow of new business.

• There are both systemic reasons for this (for example the initial requirement for wet signatures being the most commonly cited) and even more importantly for many firms, the detrimental impact of the absence of face-to-face contact.

• Expensive office resources have been heavily under-utilised.

• For some parties, under pressure, technology has not proved as effective as hoped for and hence the requirement for further development work has been accelerated.

• Some firms report that some providers have been hamstrung by working with archaic systems and were very slow to respond; hence associated service standards and times have been adversely affected, impeding the delivery of good client service.

COVID-19 IMPACT – NEGATIVES FOR ADVISER BUSINESSES

“Advisers generally reporting it has increased communications with existing clients but new business has fallen off a cliff.”

Network/Service Provider

“Internal comms have become a bit more difficult but we are settling into a new routine from a team point of view. Clients are coming round to the new way of doing things remotely. The downside is definitely new business. This area always has to be a bit more touchy-feely so we have to try to

develop new ways of engaging with new clients – it is the softer things that need to be addressed.”

Holisticadvicefirm

“The impact of the pandemic has been felt by all of us but what the past few months have shown is the need to not only continue supporting advisers, but adapting and evolving as the crisis unfolded. Whether that is through keeping the phone lines open, adopting new ways of accepting business, or

helping to keep advisers updated through our popular ‘In the Know’ webinar programme.”

Aston Goodey, Distribution Director, Canada Life• This interaction is seen by many as critical in the early stages of any advisory relationship.

It is not just a matter of fact finding and needs analysis but related much more to chemistry and deciding whether the client/adviser fit is good.

• This is a two-way street – it is as much for the client’s benefit and reassurance as it is for the adviser. They both need to decide whether they are going to be able to work together effectively.

• New business issues at the transactional end of the market are apparently slightly easier – indeed one respondent commented that although the mortgage market was temporarily stymied, many advisers had been successful in focusing on protection insurance sales.

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Looking ahead, many of the changes are likely to be there permanently:

• Less time on the road, more working from home and less time in expensive commercial office environments (perhaps creating opportunities for some property repurposing).

• Development of more hybrid approaches to the advice business, embracing technology, balancing face-to-face and remote delivery of services.

• But associated viability and success will be dependent upon:

Adviser aspirations are potentially more optimistic for increased demand from new clients than the sentiment seen in AKG’s research with consumers.

Also of note was that 35% of advisers surveyed felt that clients will be deterred from investing (35%) and clients will shift to low-risk investments (28%) because of the impact of COVID-19.

Consumer quant stat: COVID-19 advice requirements - Just under one-fifth (17%) said they will have a need for advice due to COVID-19. Over half (56%) of those surveyed do not believe they will have a need for financial advice as a result of the coronavirus crisis and 27% don’t know.

Doyoubelieveyouwillhaveaneedforfinancialadviceasaresultofthecoronaviruscrisis?

In another consumer question, 44% of those surveyed were increasingly concerned about the risk to their finances from major shocks such as the coronavirus crisis.

Adviser quant stat: COVID-19 impact on adviser business concerns - When asked what survey respondents believe are the long-term implications of the current COVID-19 crisis for advisers the sentiment was generally negative with many feeling that it would lead to exits from the industry in a variety of forms.

Whatdoyoubelieveare the long-term implicationsofthecurrentCOVID-19crisisforadvisers?

53% felt that COVID-19 impact will force firms out of business, 45% that it will mean more advisers retiring and 34% that it will mean more adviser businesses being sold (potentially less negative connotations here for those involved in adviser business M&A activity).

Adviserquantstat:COVID-19 implications forclients - When asked what they believe to be the long-term implications of the current COVID-19 crisis for clients, many advisers saw a positive outlook for engagement. 52% felt that it will increase demand for financial advice from their existing customers and 48% felt that it would increase demand from new customers.

Whatdoyoubelieveare the long-term implicationsofthecurrentCOVID-19crisisforclients?

• Excellent communications systems and processes.

• Brilliant technology infrastructure - seamlessly integrated between front and back office functions and also integrated with platform and provider services.

COVID-19 IMPACT – LOOKING FORWARD

No - 56%

Don’t know - 27%

Yes - 17%

Source: Quantitative consumer market research questions

Source: Quantitative adviser market research questions


It will increase demand for financial advice from existing customers - 52%

It will increase demand for financial advice from new customers - 48%

Clients will be deterred from investing - 35%

Clients will shift to low-risk investments - 28%

It will have no long-term impact - 12%

It will force firms out of business - 53%

It will mean more advisers retiring - 45%

It will mean more adviser businesses being sold - 34%

It will affect recruitment plans negatively - 27%

It will have no long-term impact - 22%

It will accelerate the shift to robo-advice - 16%

It will mean fewer advisers being self-employed - 14%

It will affect recruitment plans positively - 6%

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CURRENT STATUS - THE ADVICE MARKET 2020

ADVISER CONCERNS

Adviserquant stat:What iskeepingadvisersawakeatnight? - When asked to confirm which external issues are giving survey respondents most cause for concern relating to the ongoing operation of their adviser business, COVID-19 impact was unsurprisingly the leading issue (76%) followed by concerns about Regulatory change (51%) and Investment market volatility (32%). These items are likely to stay high on the agenda for advisers during the remainder of 2020 and beyond.

Adviserquantstat:OperationalconcernsawayfromCOVID-19 - When asked which areas give survey respondents most cause for concern relating to the ongoing operation of their business, there was a clear top three with concerns around PI costs & excess (70%) leading the way.

Riskandcomplianceconcerns(51%)continue to dog adviser businesses and more specifically (and despite it being a factor for a while now) MiFID II/PROD (45%) is still exercising minds.

Whichofthefollowingexternalissuesgiveyoumostcauseforconcernrelatingtotheongoingoperationofyouradviserbusiness?

Whichofthefollowingareasgiveyoumostcauseforconcernrelatingtotheongoingoperationofyourbusiness?

COVID-19 impact 76%Regulatory change 51%Investment market volatility 32%Legislative change 19%Ageing client base 19%Cyber security threats 16%Brexit 14%Increased use of online/robo advice 13%Marketing costs/issues attracting new clients 12%Public perception of financial advisers 8%Client longevity 4%Other 5%

PI costs & excess 70%Risk and compliance 51%MiFID II (PROD) 45%SM&CR 16%Cap Ad requirements 15%GDPR 13%Recruitment/staffing 13%Gabriel reporting 12%Fee and income reconciliation 12%IT front & back office 12%Marketing & social media 9%Other 3%



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“The challenges being faced by advice firms with pending professional indemnity insurance renewals and those who have had little option but to accept unacceptable terms or cease trading is leaving the

sector and consumers exposed.

Advisers across the country are doing a great job supporting their clients in these unprecedented times so it is frustrating to hear from many of them that the ever-present problem for the profession –

obtaining affordable, comprehensive professional indemnity insurance – continues.Amid the current crisis, financial advice is more important than ever before and we cannot as a society afford to lose such valuable services, which is why the PFS proposed action to overhaul the funding of

consumer education and compensation is needed in both the short and long-term.”

KeithRichards,chiefexecutiveofthePersonalFinanceSociety

OVERVIEW OF KEY FACTORS

Leaving aside issues relating to COVID-19 for a moment, interview participants generally felt that notwithstanding some emerging issues and some which have been around for a while, the advice market is overall fit for current purposes and continues to present opportunity.

But the key emphasis here is on ‘current’; there is no doubt that many drivers of change are likely to have more dramatic effects over the coming few years.

• Regulation both in terms of change and burden remains a major factor in the market and most firms report this is becoming more onerous and leads to major workload considerations. MiFID II ‘hangover’ is still a factor, as are the associated PROD and the new SM&CR requirements. Keeping pace with compliance and all of its associated considerations and requirements is therefore an ever-changing and challenging issue for firms.

• Interviewees typically differentiate between two different, broad types of ‘advice’:

• Most firms recognise that the continuum from product advice to full holistic financial planning is not necessarily a series of discrete services but potentially a smooth journey from one service to another. However, whilst acknowledged, it is not clear that this is currently well reflected in the ways in which firms interact with the market and hence represents a future development opportunity for some.

• There is (still) much discussion about ‘the advice gap’ but many firms participating in these interviews would argue that there is adequate capacity for all current genuine client needs:

• Interestingly, the obverse of this fact is there is no real competition between adviser firms. Client inertia is evidently a powerful force and once relationships are established, switching is rare – with most competition, where it does exist, occurring in the transactional part of the market.

“In many ways there has never been a better time to be an adviser. The need for advice is greater than ever especially around pension planning and vulnerability to circumstances. There are capacity

issues – advisers can pick and choose clients. But this is not sustainable in the longer-term”


• Product advice – sometimes nothing more than guidance or information relating to a specific product solution to address a specific requirement. Very transactional in nature, deliverable by a wide range of media, often a derived purchase (e.g. protection to go with a mortgage).

• Financial advice/planning – for most advisers this is the true advice market. It has a range of different shades and nuances relating to wealth accumulation, decumulation and long-term planning. This is all about relationships, taking the long view and requiring a partnership between client and adviser.

• Transactional support is readily available from a wide range of sources; from self-service to specialist and full-service advisers.

• Financial advice is available to all clients who are able to and/or choose to pay for it – none of the firms interviewed reported cases where clients had been turned away for lack of capacity.

“Increasingly it is a matter of matching the delivery mechanism whether digital or personal (or a combination of the two) to client needs and preferences.”

VerticalIntegrator/Disruptor

“There is a lot of loyalty and/or inertia in the advice market and, as a result, little effective competition.”


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• Nevertheless, interviewees recognise adviser numbers are shrinking and ageing client bases are also vulnerable to the ravages of time, so in that regard the market is in flux. Historically, new advisers would have emerged from the direct sales forces of banks and insurance companies, while new clients would have been accumulating wealth often alongside generous DB pension arrangements. None of these things are happening in 2020 and there are concerns the situation is deteriorating.

• Education is seen as the long-term solution but, again, many of those interviewed are concerned that this is not a more vibrant area. There are perceived to be gaps right across the market – little if anything in schools, limited efforts through the workplace for young adults, a gap for academies to replace the old direct sales force training grounds for advisers or a widely known apprenticeship programme.

• As is considered when looking at drivers of change, there is a widespread feeling among advisers that the whole financial services value chain (including the advice element) is rather dysfunctional, disjointed and disrupted at present with a range of regulatory and economic pressures. Yet conversely at the individual adviser level all appears well; advisers are busy and can advise their chosen client banks as required until they decide not to do so.

“Access, knowledge and lack of understanding are big concerns. There needs to be much greater focus on education and institutions like CAB could play a much greater role. We should not rely on guidance,

however – it is too dangerous.”

Mainstreamadvicefirm

ADVISER NUMBERS AND POTENTIAL REMEDIES

Overthenext2to3yearsdoyouthinkthetotalnumberoffinancialadvisersintheUKwill…

Rise by more than 5% 4%Rise by up to 5% 9%Stay the same 11%Fall by up to 5% 29%Fall by more than 5% 42%Not sure 5%Allincrease 13%

Alldecrease 71%


71% saw a decrease in numbers to a range of degrees – 29% predicting adviser numbers to fall by up to 5% and 42% predicting a bigger fall in numbers by more than 5%. Only 11% of those surveyed felt that adviser numbers would stay the same and only 13% predicted any increase.

Adviser quant research stats: Adviser numbers predictions - There was also a stark forecast emerging from the online survey when respondents were asked what they think will happen to the total number of financial advisers in the UK over the next 2 to 3 years.

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Adviserquantresearchstats:Adviserreplenishment-Whatshouldbedonetoattractnewadvisersintotheindustry? - It is clear therefore that adviser ranks need to be replenished and, whilst early associated activities in some quarters may already be in train to address this, it will need ongoing concerted cross-industry energies and initiatives to change the dial.

Those advisers surveyed were supportive of a range of initiatives designed to attract more advisers:

• Coordinated approach by trade bodies and providers to attract new blood

• More emphasis in schools and universities on building awareness of financial advice industry opportunities

• Further expansion of adviser apprenticeship schemes to attract and train future advisers

• Further development of programmes to attract candidates from outside the industry

Pleasestatewhetheryouagreeordisagreewiththefollowingstatementsonwhatshouldbe done to attract new advisers into the industry:

Whatdevelopmentwithinyourbusinesshasdoneorcoulddomosttocreaterequiredtime/costefficiencies?

Answer Choices Agree Disagree Don't knowThere needs to be a coordinated approach by industry trade bodies and financial service providers to attract more advisers into the industry

78% 11% 10%

More should be done by schools and universities to educate and inform students about a career in the financial advice industry

78% 11% 10%

Providers should expand their apprenticeship programmes to attract and train potential future financial advisers

77% 11% 12%

Financial services providers need to develop their own programmes to attract candidates from outside the financial services industry

75% 14% 11%

The Government should consider sponsoring and supporting a sustained initiative to help recruit advisers into the industry

41% 37% 22%

I think that the flow of new recruits into the financial advice sector is sufficient

6% 77% 17%

Better use of back office capability 59%Introduction of Skype/video conferencing for client discussions 34%Better use of platform capability 32%Better client segmentation 29%Referral partnerships with other professionals (lawyers, accountants) 29%Referral partnerships for specialist advice (e.g. equity release or pension transfers) 23%Reduction in number of clients serviced 23%Specialisation of your advice offering 20%Development of or engagement with an automated advice solution 14%Staff recruitment 12%



“Capacity is shrinking and we need to find ways of attracting new quality professionals into the field – maybe through building academies.”

VerticalIntegrator/Disruptor

CREATING COST EFFICIENCIES WITHIN ADVISER BUSINESSES

Adviser quant research stats:Developments to create required time/cost efficiencieswithin businesses - What remains clear through AKG’s core financial strength assessment work – on both the distributor and manufacturer sides of the fence – is that successful businesses moving forward will need to continue to create relevant time/cost efficiencies. Through the quantitative adviser research AKG was therefore keen to see where respondents felt these efficiencies had been or could be created.

It was interesting to see here that respondents felt that they had or could make better use of back office capability (59%) and platform capability (32%). It would certainly seem to make sense to focus on maximising the benefits of propositions/services/tools which are already being used (and paid for) within intermediary businesses.

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“Firms can impact the time, revenue and profit they can generate by adopting the correct uses of technology. Our eAdviser Index, which gives Intelligent Office customers a score determined by their

adoption of technology, has shown us that firms which embrace and adopt the technologies available generate, on average, 90% more revenue per adviser than those that do not. There really is a marked

difference between those firms which are using the technology and those which are not.”


“The introduction of new systems and processes can provide huge opportunities for advice firms to identify time and cost efficiencies. However, as the saying goes, you can have too much of a good

thing, and that’s certainly true of technology. As more systems are introduced, the more conversations need to be had between them. Without being clear on their purpose there is the risk advisers are

overwhelmed with solutions which don’t integrate effectively, and that’s something that will need to be addressed. This is where platforms and advisers need to work together, identifying challenges and how to address them with specific propositions, and I think we’ll see many examples of co-creation in years

to come.”

JackieBoylan,HeadofFidelityFundsNetwork


34% of survey respondents felt that the introduction of video conferencing for client discussions had or could create business efficiencies. While some may already have been trialling video conferencing for client discussions there is no doubt that COVID-19 lockdown restrictions have taken this opportunity to the next level.

Steadily via post-RDR business remodelling exercises, and more recently driven by MiFID II/PROD suitability requirements, some intermediary firms have been focused on client segmentation exercises. 29% of those surveyed recognised the benefits of better client segmentation in terms of creating time/cost efficiencies within their business. These segmentation exercises will need to be done on an ongoing basis to remain beneficial. Perhaps not all but most of these will have resulted in intermediary firms targeting the servicing of those clients which represent most profitable business.

It was also interesting to see the targeting and development of referral relationships in order to create required time/cost efficiencies within businesses - 29% saying that they had cultivated referral partnerships with other professionals (lawyers, accountants) and 23% for specialist advice (e.g. equity release or pension transfers).

Adviser quant research stats: Predictions for intermediary firmM&Aactivity - It was interesting to ascertain predictions for M&A activity amongst intermediary firms over the next 2 to 3 years. Over three-quarters of those advisers surveyed predicted further growth in M&A activity with 34% predicting that it will expand rapidly and 44% feeling that it will gather momentum. This direction of travel is evidently not something that is going to be slowed down by COVID-19 and indeed deals have continued to be announced and completed over recent weeks.

A couple of interesting associated considerations when it comes to M&A activity with intermediary firms. Despite the fact that a rich seam of M&A activity has apparently become the norm, the challenges presented by the integration of businesses and personnel, and endeavouring to maintain ‘BAU’ status during the process, should never be underestimated. As vouched for by some of those on the inside of such deals and integrations. In particular retention of advisers post-deal remains a potential pressure point where advisers might be less than enamoured with the new proposition/model.

On the other side of the fence, M&A activity amongst intermediary firms continues to have an impact on the fortunes of providers, platforms and DFMs whereby a key account or strategic partner might effectively be lost in a short space of time.

ADVISER M&A ACTIVITY PREDICTIONS

What are your predictions for M&A activity in the adviser market over the next 2 to 3 years?

It will expand rapidly 34%It will gather momentum 44%It will slow down 22%It will stop altogether 4%


Pg. 16


ADVISER COMPETITION?

Adviserquantresearchstats:Doadvisersfearcompetitionandifsowherefrom? - Survey respondents were asked, in terms of potential competitors, where they see the biggest threats to the future success and sustainability of their adviser business coming from.

The highest percentage response, just under half (47%) said that they do not see any serious threats to the future success and sustainability of their business, echoing sentiment in the adviser interviews.

But just shy of one-quarter of those surveyed felt that there would be threats both in the form of ongoing competition from online advice services (24%) and from provider-based financial planning teams (23%).

Intermsofpotentialcompetitors,wheredoyouseethebiggestthreatstothefuturesuccessandsustainabilityofyouradviserbusinesscomingfrom?

We do not see any serious threats to the future success and sustainability of our business

47%

Ongoing competition from online advice services 24%Competition from provider-based financial planning teams 23%Increased competition from online advice services following COVID-19 16%Competition from other financial planning firms 16%Competition from vertically integrated advice offerings 15%Competition from bank-based financial planning teams 14%Other 1%


Pg. 17


THE FINANCIAL SERVICES CLIENT OF TODAY AND TOMORROW

OVERVIEW

The financial services client of the recent past has typically been younger and transactional or older and relationship-based with an array of savers and wealth accumulators in between. Interview participants recognise that all three areas are potentially approaching a state of flux:

• Younger transactional clients are often life-event driven with the protection needs associated with young adulthood, starting a family and buying a home. Many of these events are now occurring later and many young adults are entering the market with debt.

• Traditional wealth accumulators are also carrying greater debt later into their lives and their major wealth accumulation vehicles (formerly DB pensions and ISAs) are now likely to be in the form of auto-enrolment and other DC arrangements.

• Older affluent clients represent an ageing and ultimately shrinking client segment whose wealth, apart from funding their own retirement years (including costs of care), would eventually find its way to younger generations. This dynamic too is changing with younger generations sometimes needing help with debt and also, in some cases, parents needing help and support in later life.

• Most advisers still regard their client as being an individual (or possibly a household unit) but there are also different possible audiences including business owners/directors, and multi-generational family units. Targeting opportunities here will require different approaches as each will have different needs and preferences and hence require different approaches.

• While there is some talk in the market about the emergence of multi-generational client units, few advisers appear to be concentrating on this – though they will often hope to benefit from referrals from clients of one generation to the next and so this appears an area ripe for further development.

• One objection is that the needs of different generations are so different that advice can become more challenging. Most advisers would therefore work with their traditional clients and advise on specific wealth transfer actions rather than formulating long-term strategies to plan for this.

“Sometimes, it is worth taking a step back. Today’s older asset-rich clients were not always born that way. They started with relatively little (even debts) and then needed a mortgage. By their 40s-50s, they were becoming net savers and worth taking an interest in. By their mid-60s and beyond they

became full advice/planning clients. Relationships have to start somewhere. The client of today has the same evolving needs as ever but the advice system to support him/her is weaker than 30 years ago.

Education is critical to redressing the balance.”


“The old family office may re-emerge with the changing market meaning that the finances between generations are becoming more interlinked; for example, grandparents supporting grandchildren in younger life, giving them a leg up. This may be dependent on technology as younger generations will

expect this.”


“The pension freedoms have created a significant opportunity for advisers looking beyond the conundrum of annuity or drawdown. Passing wealth tax efficiently down through the generations should be the new norm as the baby-boomers draw on assets. These ‘wealth bubbles’ should be

managed on single platforms to ensure the most efficient and optimum client outcomes through the generations.”

Aston Goodey, Distribution Director, Canada Life

Pg. 18

DISCUSSING FINANCES

EXISTING ADVISER RELATIONSHIPS

But people are most definitely discussing their finances.

Consumerquantfindings:Discussingfinancesisnottaboo(all) – 40% of those surveyed have discussed their financial planning with their partner/spouse/friends within the past year and 29% have done so within the past month because of the coronavirus crisis.

The reality in the wider world, outside of this ‘bubble’, is that advice is still more likely to be accessed by a minority.

Consumerquantfindings:Accessingfinancialplanningisstillaminoritysport(all) – 24% of those surveyed have seen a financial adviser to discuss financial planning alone in the past five years and 17% have done so in conjunction with their partner/spouse in the same timeframe.

Inthepastfiveyearshaveeitheryou,and/oryourspouse/partner,soughtadviceonyourfinancialplanningfromanadviser?

32% have never seen a financial adviser to discuss financial planning while 25% have not done so in the last five years but did previously see a financial adviser.


“The subject of intergenerational wealth transfer has historically been uncomfortable to broach – some even describing it as ‘taboo’. The lockdown of 2020 has made clients revisit what is really important

to them (with the emphasis on health and happiness in a wider context of wealth) - in particular the importance of personal relationships and family. This has led barriers to be broken around emotive

conversations. As we emerge into a ‘new normal’ it is highly likely that a redefined connection between multiple generations will be at the top of the planning agenda.”

JohnPorteous,GroupHeadofDistribution,CharlesStanley

• Some advisers also feel that their clients are not always comfortable discussing these matters with younger generations except on a ‘needs’ basis.

• A very powerful factor at the financial advice end of the market is loyalty and consequent client inertia. Clients very seldom leave an adviser for a competitor. In fact, today it is more likely that an adviser will consider ‘leaving’ a client because the economics of doing business are proving challenging.

• Other than this, there appear to be few issues with fees for existing clients. Clients seem happy to pay for their advisers’ services and according to interview participants they are predominantly paying for peace of mind and reassurance. For transactional clients, the client is paying for a simpler service.

• For most relationship-based advisers, personal referrals are the most common and best source of new business. Almost all advisers believe that face-to-face operation is key to new business acquisition but less essential for servicing on-going clients.

Much of this is extremely relevant to the discussion about current and future advice opportunities and challenges, but is however also reflective of life in the ‘advice bubble’ that exists at the mid to top-end of the market (but most specifically at the top-end). Those targeting longer-term business development and growth will need to do some more creative thinking to entice more future clients.

“Auto-enrolment is probably the most powerful long-term driver and will bring about changes in advice and how it is delivered.”


No, I/we have never seen a financial adviser to discuss financial planning - 32%

Not in the last five years, although I/we did previously see a financial adviser to discuss financial planning - 25%Yes, I have seen a financial adviser to discuss financial planning alone in the past five years - 24%Yes, we have both seen a financial adviser to discuss financial planning together in the past five years - 17%Yes, my partner has seen a financial adviser to discuss financial planning alone in the past five years - 3%

Percentages do not add up to 100 due to roundingSource: Quantitative consumer market research questions

Pg. 19


Haveyoueverdiscussedyourfinancialplanningwithyourpartner/spouse/friends? Whatdoyouvalueaboutyourrelationshipwithyouradviser/firm?

Within the past year 40%Within the past month because of the coronavirus crisis 29%Never – and I doubt I will 11%Never – but I expect I will do at some point 9%Between two and five years ago 6%Between six and ten years ago 3%More than ten years ago 2%

Peace of mind over financial decisions 55%Access to ongoing support 48%Ideas on finances/investments 42%Range of expert support across different financial sectors 30%The wide range of services offered 29%Access to better rates/deals 27%Validation/support for my own decisions 26%Someone to rely on in crisis such as the coronavirus 19%Access to bespoke investment opportunities 19%Transactional support 15%Life coaching/support from someone I trust 15%



Evidently discussing finances is not taboo, rather it is prevalent, and for some it has evidently been necessitated by COVID-19. But the big question for the industry is: how do we convert more of this interest and these discussions with friends and family into meaningful engagement with financial advisers where these relationships are not in place? Or at least into meaningful engagement with other financial services solutions, i.e. DIY, guidance?

These provide great key threads for marketing messaging from intermediary firms, and the advice industry more broadly, in terms of positioning and promoting the benefits and value of their planning services.

But in terms of tangibility it can also be difficult to put a price (advice fee) on the value of peace of mind.

BENEFITS OF ADVICE

From a pure marketing and key messaging perspective it seems clear that the industry could do a better job of communicating the benefits and value of financial advice. And the consumer research shows that there is definitely some ammunition there to be used from their key supporters.

Consumerquantfindings: For those with an advice relationship in place the benefits are obvious (a subset) - In the pre-survey profiling questions we sought to establish those respondents who already had an adviser relationship in place. 28% (291) have an ongoing personal relationship with an adviser and 6% (64) have an ongoing relationship/access through their workplace.

This advised subset was then asked to confirm what they value about their existing relationship with their adviser/firm and the top three reasons selected from the list of options provided were:

• Peace of mind over financial decisions (55%)• Access to ongoing support (48%)• Ideas on finances/investments (42%)

“Given the degree of uncertainty and disruption that society has faced so far in 2020, the value of structured and professionally thought through financial planning is significant. Equally, against a

backdrop of market volatility and economic disruption, this value must be explicit and communicated in a fashion that resonates with clients (eye of the beholder). Increasingly, a positive value exchange

cannot just be assumed – it should be agreed.”


Pg. 20

OBSTACLES FOR ENGAGING WITH ADVICE - WHY HAVE YOU NOT SOUGHT OUT ADVICE?

Consumerquant findings: If not, what is holding you back? For the 57% (589) of the total research sample who said that they had not seen a financial adviser in the past five years, AKG wanted to establish what the main reasons were behind this lack of engagement.

ConfidenceintheirownknowledgeandDIY – The main response selected here, by 43% of those who had not accessed financial planning in the past 5 years, was that they don’t need it as they have a good financial understanding and make their decisions independently.

Paymentisastumblingblock - 27% said that they do not want to pay for financial planning and 19% said they can’t afford it.

The trust issue - 20% said that they are afraid of pushy sales techniques.

Whether or not this consumer confidence in their own financial understanding is well placed is a slightly moot point for the intermediary market as if this stance is maintained then this type of investor is likely to continue to do things themselves. But it should be acknowledged in terms of the way in which we might discuss financial services matters via some communication/marketing channels, i.e. consumer knowledge in some areas shouldn’t be underestimated as it sometimes is.


Ifyouhavenotconsultedafinancialadviserinthepastfiveyears,whyisthis?

I don’t need it – I have a good financial understanding and make my decisions independently

43%

I do not want to pay for it 27%Afraid of pushy sales techniques 20%I can’t afford it 19%I have not reviewed my financial objectives in the past five years 14%Financial advice is not relevant at my stage in life 14%I keep putting it off 12%I do not have the time for face-to-face consultations 5%I don’t know how to access an adviser 3%I cannot access online/technology based financial advice solutions 1%



Payment for advice, at all or at what appropriate level, will evidently remain an ongoing discussion point for the industry for some time to come. Affordability and establishing a price that some clients are prepared to pay is, in the lower to mid-end of the advice market, evidently a dealbreaker.

While much progress has been made post-RDR on the establishment of trust in the advice industry there are clearly still less positive perceptions amongst some consumers who don’t want to feel that they are being aggressively sold to and hence this body of work to build, or rebuild, trust remains very much an ongoing objective (and something that the FCA remains keen to address/redress).

Further interesting factors around lack of seeking out financial advice were:

• I have not reviewed my financial objectives in the past five years (14%)• Financial advice is not relevant at my stage in life (14%)• I keep putting it off (12%)

These are areas where future potential advised clients might well exist, with a lack of engagement seemingly based on a combination of reticence and/or a lack of organisation and time.

Doyouregretnotseekingfinancialadviceoveranymajorfinancialdecisions?

All consumer survey respondents were asked whether they had any regrets on not seeking financial advice over any major financial decisions made in the past.

Doyouregretnotseekingfinancialadviceoveranymajorfinancialdecisionsyouhavemade?

Only 9% of those surveyed expressed regrets. It was perhaps surprising to see such confidence displayed here with the majority (71%) saying they had no regrets although this does echo other sentiment seen in the research which pointed towards consumer confidence of doing things themselves.

No - 71%

Not applicable - I have always consulted a financial adviser when making major decisions - 12%

Yes - 9%

Don’t know - 8%

Pg. 21


WHAT MIGHT ENCOURAGE YOU TO ENGAGE WITH ADVICE?

The holy grail. For the 57% (589) of the total research sample who said that they had not seen a financial adviser in the past five years, AKG wanted to find out what factors might encourage them to engage in future.

Statesponsoredadvice? – 37% of those who had not accessed financial planning in the past 5 years felt that the availability of a Government-backed service would make them more likely to seek financial advice. Very interesting to note that support from some form of Government-backed service might be appealing to some.

MaPS has had its hands full with the completion of merger and integration activity while ongoing strategy development remains on the cards, including a broadening of scope to bring debt into play, but this provision of advice theme feels worthy of further industry discussion and exploration during 2020/21.

Drivenbymajorlifeevents - 35% said that major life events, such as buying a house or retirement, would make them more likely to seek financial advice.

This needs to be acknowledged by those targeting new client acquisition opportunities. For many of us as consumers, waking up and seeking financial advice or financial products, is simply not a daily occurrence, rather behaviour that is likely to be driven by a specifically important life event or situation.

Fixed fees - 21% said that fixed fees for consultation would make them more likely to seek advice.Workplaceaccess - 15% said that if their employer offered access to advice they might be more likely to engage.

Many people that might be encouraged to access advice see this interest as being driven by a fundamental life event and its associated requirements, whilst to some degree there appears to be continued opportunity for provision of advice as a form of workplace benefit.

Further interesting factors around lack of seeking out financial advice were:

• Having all my finances/accounts online in one place (14%)• Major financial shocks such as the current coronavirus crisis (13%)• Being able to conduct consultations online (12%)

Whatwouldmakeyoumorelikelyyoutoseekfinancialadvice?

Availability of a Government-backed service 37%Major life events such as buying a house or retirement 35%Fixed fees for consultation 21%My employer offering access to advice 15%Having all my finances/accounts online in one place 14%Major financial shocks such as the current coronavirus crisis 13%Being able to conduct consultations online 12%Greater use of technology by financial advice providers 8%Being able to arrange video consultations 4%



PAYMENT FOR ADVICE

With the emphasis of the consumer quantitative research being on ascertaining appetite for engagement with financial advice AKG also asked some questions of all research participants relating to when/why they might pay for advice and how they would prefer to access advice.

Inwhatsituationswouldyouconsiderpayingfortheservicesofafinancialadviser?

The main reason/situation given was on retirement/deciding on retirement planning (39%), serving to underline just how many advice opportunities are tied, now and in the near future, to retirement planning and the cohort of consumers for whom planning for this lifestage and its associated requirements is and will be relevant.

Inwhatsituationswouldyouconsiderpayingfortheservicesofafinancialadviser?

On retirement/deciding on retirement planning - 39%

For advice on inheritance planning - 32%

For ongoing advice on pension planning - 31%

For ongoing advice on my investments - 28%

When applying for a mortgage/remortgage - 23%

For advice on funding care - 18%

When making investment decisions on an ad-hoc basis - 17%

For advice on buying buy-to-let property - 12%

Pg. 22


Interesting to see too that there appeared to be some appetite for paying for advice on inheritance planning (32%). A slightly more specific requirement, in terms of mitigating IHT, but intrinsically linked to wider retirement planning.

And there also appeared to be some potential appetite for ongoing advice on pension planning (31%), for ongoing advice on investments (28%) and when applying for a mortgage/remortgage (23%).

This payment preference appears to point towards some form of transactional advice model. Given that the direction of travel for many adviser firms post-RDR has been to focus mainly on ongoing fee models it will be interesting to see if transactional models can be reimagined and can then subsequently thrive for those customers who require more one-off support with key financial planning considerations.

25% underlined their unwillingness to pay for financial advice and 10% didn’t know their preference.

A key market driver of growth continues to stem from clients seeking advice on retirement planning. Tied to this is recognition from consumers that they require advice on inheritance planning. This

presents a unique opportunity for advisers to grow client banks, AUM and create further value in their own business models as funds flow between generations.”

Aston Goodey, Distribution Director, Canada Life

“Advice must become more attainable for more people over the coming years. Technology is a real enabler here, and whilst hybrid advice hasn’t been nailed yet, this will be more of the norm over the coming years. Solutions that can provide more of the ‘financial planning’ allowing advisers to attract and service their clients will become more and more important. The ability to flex to client needs, offering the level of personalisation they experience in other areas of their lives will also be key.”


Howwouldyouprefertopayforfinancialadvice?

The preference established here was for one-off payments for advice as required (37%) with only 14% selecting ongoing annual charges.

Howwouldyouprefertopayforfinancialadvice?


A one-off payment for advice as required - 37%

I would not be willing to pay for financial advice - 25%

Ongoing annual charges - 14%

Don’t know - 10%

On an hourly basis for advice as required - 8%

A combination of hourly charges and one-off payments as required - 6%

HOW WOULD YOU MAINLY PREFER TO WORK WITH A FINANCIAL ADVISER?

55% of those surveyed expressed a preference for working with a financial adviser on a face-to-face meetings basis, while 22% said that they would mainly prefer to engage remotely via technological solutions. Evidently there are opportunities for both engagement and servicing methods moving forward, but an interesting balancing act between the two.

Much of the discussion during lockdown has been of the success of us all using video call technology on our devices to connect with colleagues, friends and family. It is therefore interesting to see from the research findings that, while one-fifth of respondents suggested that they would be comfortable with engaging remotely via technological solutions, over half of respondents (still) have a preference for working with a financial adviser on a face-to-face meetings basis.

Percentages do not add up to 100 due to roundingSource: Quantitative consumer market research questions

Face-to-face meetings - 55%

Mainly remotely via technological solutions - 22%

On a transactional basis - 15%

As a partner/ongoing relationship - 9%

Pg. 23

DRIVERS OF CHANGEThe advice and financial services distribution sector is in a state of flux. Even before COVID-19 struck, profound changes were under way. The pandemic has accelerated some of these changes but most, if not all, were happening anyway as a result of the combination of the effects of a number of drivers of change noted by interview participants.

The drivers identified in discussions with these interviewees can be considered based on their immediacy and likely impact. They are considered here under the headings immediate, medium-term and long-term.


IMMEDIATE IMPACT DRIVERS

• COVID-19 - recognised by all participants as a driver of change or at the very least an accelerant. It has prompted:

• Regulation; after the obvious pandemic references, this is the most frequently mentioned immediate (and medium-term and long-term as well no doubt) driver of change.

• ProfessionalIndemnityInsurance- already linked with issues relating to DB transfer advice, this is an area of urgent and growing concern for many advisers. PI is already a very hard market but there are major concerns that the market will harden even further in the immediate future, not least because of possible consequences of COVID-19 claims and litigation.

• Wholesale review of working practices and methods leading to greater efficiencies in terms of productivity, reduced travel times and costs.

• More efficient client communications, a reduction in face-to-face time and greater remote contact (with some advisers saying they have had greater client contacts as a result).

• Review and revamping of practice management processes and procedures for larger firms.

• Concerns about getting a flow of new business into the pipeline.

• Acceleration of integration of technology into working practices, both back and front office - and for those firms that were lagging on this front greater focus on addressing issues and seeking solutions.

• Closer scrutiny of platform services and their effectiveness.

• Review of the performance of a range of providers under the pressures of the pandemic which may lead to long lists of winners and losers.

• Consideration of client needs and preferences, based on COVID-19 impact.

• Review of investment propositions including looking at multi-asset and other risk diversification approaches to see how these have responded in volatile markets.

• Acceleration of consideration of ESG and other impact investing strategies.

• The DB market review was top of mind for many firms at the time of this fieldwork and this has caused substantial reduction in the capacity of the market to deal with DB transfers, and may also carry with it associated redress concerns.

• In reality, however, firms feel there is always something that needs to be addressed in terms of regulatory requirements.

• Many feel the associated compliance burden is onerous and shows little sign of becoming more manageable.

• SM&CR is another current consideration.

• PROD is still being bedded in and MiFID II is still far from perfectly assimilated by the market, especially as regards transparency and cost disclosure.

“As always, regulation is a huge factor - very obtrusive, increasing numbers of dear CEO letters, reviews - all seem to be growing in breadth and scope. It is becoming ever more challenging for smaller firms

to cope with the burden - it may way drive a lot more consolidation.”


Pg. 24


MEDIUM-TERM DRIVERS

• Transparency is an increasingly key requirement. Much regulation is focused on achieving this objective and advisers welcome initiatives to ensure full disclosure of all costs.

• Costs - This itself drives greater scrutiny and downward pressure on costs; moves by advisers to increase the efficiency of their operations can be seen against this background but according to some firms, this is increasing focus on platform charges, DFM charges (and value for money) and throwing into sharp focus the difference in the comparative costs of active and passive investment propositions.

• Viability - Associated with these drivers, advisers are worried about the economics of running advice businesses especially against the background of an expected traumatic economic downturn. Many feel there are serious existential threats to many advice businesses. The economics of operating advice businesses are becoming increasingly challenging, not just on the cost side of the P&L but also the income side. The economy could well drive down not only new business flows in the short term but also a reduction in the value of funds under advice as clients become increasingly unable to maintain their current investment levels.

“The advice sector is confronted by ever rising costs driving a need for efficient back offices and cost-effective ways of addressing client needs. Regulatory and PI costs are a big concern.”

Verticalintegrator/disruptor

LONGER-TERM DRIVERS

Longer-term drivers are those expected to have an ongoing impact long after the current challenging circumstances have been addressed

• Demography – ageing population and one where those entering retirement in the future will often be less asset rich than the current generation of retired clients but with potentially a longer retirement to fund with the emerging threat of needing to fund care in old age as well.

• Economy – effects of a potential post-COVID-19 recession may last a long time and many advisers fear the fact that more consumers are carrying more debt until much later in their lives than immediately preceding generations.

• As a result, changing customer needs and requirements throughout the life cycle for example with more focus on debt management in earlier years and lower asset values going into retirement years.

• Associated with this driver, advisers and clients are becoming more aware of the impact of environmental considerations on investment strategies. More advisers are reporting that clients are focusing on technology, healthcare and ESG in the new investment world. The pandemic has undoubtedly accelerated this trend.

• As far as the advice world itself is concerned, while the existence of a real effective current advice gap was questioned, there are wide concerns about decliningadvisernumbers. None of the firms interviewed felt it was a particular issue for them at this stage, but they have concerns about the future of the profession while declines continue.

• Technology is a key long-term driver of change but none of the firms interviewed feel that it is a standalone solution to delivery of advice in the future as has sometimes been promised in previous false dawns. Moreover, it is seen more as a crucial facilitator and building block in a coherent distribution proposition that can stretch from self-service to holistic long-term planning.

• Above all, financialeducation is seen as the long-term key by many advisers to both the current shortage of advisers, which they generally believe is getting worse, and to the demand side of the equation. In the past advisers were educated in full-service insurers and other providers with their own sales forces. It was a natural career progression to move from sales to financial advice.

• This ‘nursery’ no longer exists as a significant force and many advisers feel there is an opportunity for some larger participants in the value chain to create academies or sponsor financial services apprenticeships. Such endeavours would be helped by the presence of financial education in the school curriculum. This would also bring forward more enlightened customers. Over the decades there have been many worthy attempts to address this issue but none of the firms in this project were able to identify particularly successful initiatives.

Pg. 25


ESG

Adviser quant stats: ESG - It would be fair to say that ESG (environmental, social and governance) has been one of the key buzz words in the financial services industry over the past 12 to 18 months with a raft of ESG-themed investment funds/portfolios being made available to advisers and their clients.

AKG was therefore keen to check the pulse with advisers on this theme and to find out whether they factor in ESG related questions to client factfind exercises. The majority of those surveyed, 60%, said that they already did factor in ESG, while 22% expected to introduce ESG related questions to client factfinds in the next 12 months.

Have you reviewed your investments to ensure they are sustainable and sociallyresponsible?

Judging by these findings, the associated buzz around ESG appears set to continue but moving forward the market will need to mature somewhat. It will be important to get under the bonnet of ESG propositions to establish manager credentials and approaches and also to get a better understanding of key differentiators and performance drivers/dynamics.

Consumer quant stats: ESG - But what of consumer interest? AKG’s survey asked all those with stated investable assets of more than £100,000 (around one-third of total research participants) whether they have reviewed their investments to ensure they are sustainable and socially responsible.

Just over half (52%) of this subset of respondents had not done so, but one-quarter (24%) of the subset had, under their own steam, reviewed their investments to ensure that they are sustainable and socially responsible and one-fifth (21%) had done so with the support of an adviser.

DoyoufactorinESG(environmental,socialandgovernance)relatedquestionstoyourclientfactfind?

Yes 60%No 18%Not currently but I expect to introduce ESG related questions in the next 12 months 22%



No - 52%

Yes - I have - 24%

Yes - with an adviser - 21%

Don’t know - 3%

“While awareness and appetite for socially responsible investing are increasing, we still need to complete the shift from niche investing to the mainstream. One of the main misconceptions is that it doesn’t generate such attractive yields, but our analysis shows that investors have been significantly more likely to generate outperformance from ethical or sustainable funds than from standard funds.

We need to provide the confidence that this type of investing is delivering for people’s financial future as well as for the global good.”


“We’re seeing more and more advice firms looking to cater to client demand from ESG solutions – for clients, knowing where their money is invested is increasingly important to them. As appetite and regulatory pressure increases further, advisers must be prepared to identify and balance their clients’

financial needs with their ethical and sustainable preferences in a transparent and robust way that will stand up to future regulatory, and ombudsman, scrutiny.”


On the basis of a 3-year time horizon, the irresistible conclusion from this research is that the participants in the financial advice market will look remarkably similar to those of 2020.

Despite the ‘revolution’ mentioned earlier in this analysis, the overall shape of the market may remain relatively unchanged. Beneath the surface, however, change is afoot and hence relative importance, impact and further future potential may well be different over the longer-term. Market participants should not therefore be lulled into a false sense of security.

• No-one sees the imminent demise of the financial planning market. Whilst adviser numbers may be falling, and may continue to fall, their continuing role seems assured.

• Technology, robo-services and the development of AI are very much felt likely to complement rather than replace human advisers at the apex of the business; financial advice. Their role may well be more background in analysis and developing solutions. Relationship is still seen as critical as the basis of trust in the advice process.

Pg. 26


THE FUTURE SHAPE OF THE SECTOR

• Pure face-to-face advice, however, may well over time account for a declining proportion of the financial services delivery spectrum. This is another area where technology and communications will play a growing role.

• The need for profitable and successful financial services distributors to combine good relationship skills with the necessary hard-nosed business management skills potentially militates against the long-term success of the 1-2 man bands that have been the bedrock of the advice community. They argue for firms with a broader base of skills.

• The market is changing and financial services clients are changing. The ‘new’ clients coming into the advice market will be different from those who are already being served, with different requirements and issues.

• One could even argue that the natural emergence of asset-rich clients into the full advice arena will be heavily dislocated over the coming years. Advisory firms accustomed to a steady flow of new clients through referral might need to think in terms of searching for new clients at earlier stages in the accumulation process.

• This in turn argues for a more integrated distribution proposition that embraces at one extreme the transactional needs of the younger client and at the other the relationship needs of asset-rich clients – something likely to be achieved only by firms that can find a way to offer multi-faceted, multi-channel access and are excellent at client recruitment from early in the wealth accumulation process (potentially via the workplace) to later life.

“Trust still underpins everything we do.”

Holisticadvicefirm

“One of the big issues for smaller firms is that they need both client relationship skills to underpin their business and business

management skills to run their businesses efficiently and profitably. Both require time, resource and necessary skills. The combination is

difficult for smaller firms.”

Mainstreamadvicefirm

Pg. 27


Some of the main challenges and opportunities for adviser businesses emerging from the interviews can be summarised as follows:

• One-man bands, on the basis of the qualitative research and analysis, can continue to operate as long as they choose to. They have loyal customer bases, they have enough customers to sustain the lives and incomes they seek, they have no real competition within their own spaces. They will succeed until they decide they don’t want to continue and then retire or sell their client books to others. But they are not seen as the future.

• They will often sell out to consolidators which have strong infrastructures and technology. The role of consolidators, amid the continued raft of M&A activity, will increase but as the economics of the business come under threat in the next few years and those funding the consolidators seek to ensure their own return on investment, this sector of the market may experience its own challenges. They may however have the power and resources to create the sort of integrated approach that might have long-term success and they could certainly play a key role in developing the next generation of advisers.

• A much more powerful case can be made on the basis of this analysis for the right sort of 5-10 adviser business, properly structured with strong technology, and a multi-specialist, multi-faceted approach.

• Even larger firms may have the resources necessary to go a stage or two further and become involved in adviser and investor education – the other key requisites for long-term success.

• Vertically integrated firms will also pick up business but they face serious challenges in the current market. They are seen by some to be lacking in transparency and are also often viewed as relatively high charging participants. They will need to become more transparent in how they disclose charges and indeed what charges they apply and where in the value chain.

• So-called disruptors have real opportunities to create from scratch the sort of integrated model described earlier in this analysis. Several firms referred to the advice model of the US firm Vanguard with its highly segmented and multi-faceted model and underlying fund management capability. Other disruptors are evidently showing interest in the UK market.

• Interview participants were asked about the potential for big/technology or other non-traditional brands to play a role in the market. There was considerable scepticism based largely on the lack of brand stretch into an area that has traditionally required strong elements of relationship, trust and expertise.

KEY ADVICE MARKET PLAYERS NOW AND IN THE FUTURE

• Some of these might emerge as ‘splinter groups’, dislocated post-M&A activity where advisers have not brought into the acquirer’s ‘story’.

“Banks are in a great position to make an impact – if they want it. The workplace is an underutilised opportunity too especially off the back of auto-enrolment business. Intergenerational is interesting too but different generations need different approaches – older face-to-face, younger prefer to interact

with apps.”

Holisticadvicefirm

Pg. 28


The interviews also flagged up potential challenges for other participants in the value chain:

• DFMs will need to demonstrate the value they add relative to lower cost investment approaches given the increasing scrutiny on costs (especially relative to performance).

KEY PROVIDER MARKET PLAYERS NOW AND IN THE FUTURE

• Asset managers also have continuing issues in terms of costs and disclosure and advisers commonly feel their margins will come under scrutiny and pressure.

• Platforms are increasingly regarded by advisers as enablers rather than products or services in their own right. There is a strong feeling among some interview participants that there are too many platforms in the market, that they need scale to maintain price competitiveness and that hence there will be some rationalisation in this area.

“To ensure continuing success, many DFMs will have to cut their costs and/or build greater distribution access.”

Mainstreamadviserfirm

PROVIDER/OPERATOR M&A OUTLOOK

Adviserquantstats:Provider/operatorM&Aoutlook - In addition to finding out about the outlook for M&A activity on the distribution side of the fence AKG also wanted to get adviser predictions for provider/operator M&A activity.

Responses were more measured/mixed in their outlook here (indeed not all advisers registered a response to this question) but 39% still felt that M&A activity would gather momentum over the next 2 to 3 years, with 22% feeling that it would slow down.

M&A activity has been rife across AKG’s assessment sectors in recent years and currently shows few signs of slowing down, although it remains to be seen if COVID-19 might impact on the pace of transactions in the short-term.

Despite the proliferation of M&A activity, and the best efforts made to negate associated impact on businesses throughout the process, the ability to maintain ‘BAU’ status remains ever challenging.

What are your predictions for M&A activity in the provider market over the next 2to3years?

It will expand rapidly 5%It will gather momentum 39%It will slow down 22%It will stop altogether 4%


Pg. 29


OUTLOOK FOR FINANCIAL SERVICES PROVIDERS/OPERATORS

Adviserquantstats:Outlookforfinancialservicesproviders/operators

Intermediary business is the lifeblood of the vast majority of financial services companies assessed by AKG and so in ascertaining their future prospects we were keen to find out which types of provider/operator – within and outwith AKG’s assessment sectors – respondents saw benefiting most from opportunities to service advisers and their clients over the next two to three years.

Which typesoffinancial servicesprovider/operatordoyou seebenefitingmost fromopportunitiestoserviceadvisersandtheirclientsoverthenexttwotothreeyears?

Apparently positive news here for platform operators initially with 49% of those surveyed by AKG feeling that these would benefit most from opportunities to service advisers and their clients over the next two to three years, while 26% felt that DFMs would benefit the most.

Interesting to see support for Client Portals (37%) and Lifetime Cashflow Modelling software (33%), underlining the wide range of propositions and tools that intermediary firms require to deliver their advice services to clients these days. And also highlighting some of the challenges facing more traditional L&P providers given that some product types are becoming more commoditised and indeed platforms are electing to add more in-house products these days.

“Advisers are looking for ways to work smarter and offer a better customer experience at an effective price. We launched our iMPS technology last year to reduce the time, cost and complexity that comes from managing portfolios, so that it puts advisers in control of the entire process and gives them the

power to deliver a highly cost-effective investment service to their clients.”



Platform operator - 49%

Client Portals - 37%

Lifetime Cashflow Modelling software - 33%

DFM - 26%

Practice Management Systems (aka Back Office) - 22%

Asset/fund manager - 17%

Specialist robo-advice providers - 16%

Bank/building society - 13%

Life company - 13%

SIPP operator - 9%

Research houses - 7%

Pg. 30


• Underlining the huge cost competition across the financial services value chain the Level of pricing came through as top.

• Financial strength/sustainability also came through as one of the most crucial selection/retention criteria.

• Range of product/investment solutions came through strongly as well as did online service delivery.

• Technical expertise and operational resilience also registered.

• Likely that awareness of and reliance on provider/operator online functionality and capability has risen in importance during lockdown.

TOP SELECTION/RETENTION CRITERIA FOR PROVIDERS/OPERATORS

Adviserquantstats:Topselection/retentioncriteriaforproviders/operators

AKG was keen to find out what adviser respondents viewed as the most important criteria when selecting/retaining financial services providers/operators. There was an obvious pecking order in terms of those factors coming through consistently as important.

Whatarethefivemostimportantcriteriaforyouasanadviserwhenselecting/retainingfinancialservicesproviders/operators?

Answer Choices 1st 2nd 3rd 4th 5th Total%Range of product/investment solutions 25% 19% 9% 7% 4% 64%Level of pricing 35% 17% 16% 7% 10% 85%Financial strength/sustainability 13% 26% 18% 10% 10% 77%Service delivery (offline) 9% 2% 7% 8% 2% 28%Technological innovation 1% 9% 6% 4% 6% 26%Service delivery (online) 13% 10% 5% 16% 16% 60%Business development support 3% 4% 10% 3% 10% 30%Operational resilience 3% 6% 8% 6% 11% 34%Product innovation 1% 4% 9% 12% 4% 30%Security of a well-known brand 1% 0% 7% 11% 6% 25%Technical expertise 3% 2% 4% 13% 16% 38%


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RESEARCH PAPER 2020

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