07Aug

The Financial Conduct Authority has published data on the current state of the retail intermediary market, using data submitted by advisory firms in their 2020 Retail Mediation Activities Returns.

The non-investment insurance sector was the only one to report a rise in revenue from 2019 to 2020, with total revenue for these firms increasing by 1.2% to £18.62 billion.

Retail investment revenues fell by 1% to £4.4 billion, while mortgage broking revenues were down by as much as 4.2%, at £1.22 billion.

As investment advisers have been banned from receiving commission for new business for some years, it’s not surprising that the proportion of their revenue derived from commission is low and that it has fallen since 2019. These firms now report receiving 14% of their income via commission, compared to 16% in 2019.

In contrast, 84% of non-investment insurance revenue and 78% of mortgage firms’ revenues came from commissions. In both cases the figures were up by one percentage point from the previous year.

The number of investment advisers at authorised firms remained essentially unchanged, with the 2020 returns showing 36,377 individuals engaged in this capacity – it was 36,401 in 2019. However, there is evidence of a slight rise, from 47% to 49%, in the proportion of investment advisers working for larger firms, defined as those with 50 or more advisers. This is in spite of fewer than 1% of advisory firms having this many advisers – 47% have just one adviser and 42% have between two and five advisers.

In the mortgage sector, 1.5% of advisory firms have more than 50 advisers and the majority (52%) have just one adviser.

The average investment advisory firm with more than 50 advisory staff made a loss of £2.3 million during the year. In contrast, the average ‘one-man band’ firm made a profit of £90,723, rising to almost £200,000 for those with two to five advisers and almost £450,000 for firms with six to 50 advisers.

When we look specifically at revenues earned by investment advisors, 61% of the revenue from adviser charging was received by firms describing themselves as independent. The equivalent figure for 2019 was 59%. 88% of investment advisory firms described themselves as independent.

74% of the revenue from adviser charges came from ongoing advice fees, up from 70% the previous year.

Almost 50% of financial adviser firms use the percentage of investment value method to calculate client fees. 24% charge a fixed fee and 16% an hourly fee, while 10% use a combination of two or more of these methods.

Sourcing affordable professional indemnity insurance remains difficult for many firms, and the returns show that the average investment advisory firm spent 2.4% of their revenue on PII. The figure was 1.4% for the average mortgage broker and 1% for the average non-investment insurance firm. However, PII as a proportion of revenue more than doubles to 5% when we look specifically at investment advisory firms with revenue of £100,000 or less. For an insurance intermediary with this low level of revenue, PII is even more expensive, relatively speaking, at 5.4% of revenue.