1. Introduction Page Sizing the market Page 4

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2 Table of contents 1. Introduction Page 3 2. Sizing the market Page Number of financial advice firms Page Legal status (directly authorised firms) Page Number of advisers Page Financial position Page Business split and income breakdown Page Advised versus non-advised product sales Page Client base Page Savings measures Page UK savings ratio Page Long term business policies in force Page Sales of UK unit trusts and OEICs by distribution channel Page Sales of stocks & shares ISAs Page Funds held in stocks & shares ISAs Page Sources Page 22 2

3 1. Introduction This is our second annual report on "The Financial Adviser Market: In Numbers", showing the size and nature of the advice sector in the first year post RDR. We believe it is one of the most comprehensive sources of published information about the adviser market and the trends within it. It is well documented that adviser numbers fell in the run-up to the RDR as those who chose not to take the new qualification left the market. There has been a smaller recovery since because some passed their final exam a bit late or staff from the banks joined advice firms. It seems that those who stayed in the market have done well. Turnover in financial advice firms in 2013 was up by 1 per cent from 2012 and profits before tax rose by 14 per cent. However, the profits before tax figure for 2013 needs to be treated with caution. It does not include the salaries of those adviser/owners who take their pay as dividends and, as such, does not reflect the full costs of the industry. So whilst profits before tax have increased steadily since 2010, retained profits have been more volatile, as though generally they have been lower since 2010, 2013 was up on It is therefore important to remember that aggregate figures can conceal as much as they reveal. It is my sense that there is a polarisation between those doing well and those who are struggling. The level of merger and acquisition activity suggests many are still looking to exit. The impact on the businesses of those who have not got their model right will become more apparent over the next year or so. Finally, there is the question of access to advice, or "the advice gap". Now, it is not the case that prior to the RDR the whole population had a financial adviser. But with fewer advisers now, the potential supply of advice is smaller than it was. I think the bigger impact comes from the increased focus of advisers on the type of clients who are of interest to them. This means that some will be unprofitable or that advisers will feel they cannot justify a fee that covers their costs in respect of the service sought. There is a challenge for the sector to develop new ways of delivering advice at a lower cost. But it also shows the need for the regulator to look at the cost of regulation and reduce it. The data we have collected will be used to help APFA formulate its responses to policy initiatives and develop proposals for the FCA's promised review of the effectiveness of RDR. It will form the evidence base for understanding the impact of RDR and establishing and supporting APFA s position in future. We hope you find this report of interest. We will continue to update it throughout the year if new data becomes available. Chris Hannant Director General APFA 3

4 2. Sizing the market 2.1. Number of financial advice firms 1 The total number of financial advice firms i registered with the FCA as at 31 December 2013 was just over 14,300 (Figure 1), an increase of just over 1% since September 2012 ii. Figure 1: Total number of financial advice firms registered with the FCA as at 31 December 2013 The split between directly authorised firms and appointed representatives, at 35%:65%, has remained largely unchanged over the last six years (Figure 2). Figure 2: Split between directly authorised firms and appointed representatives 4 i Defined as all firms that conduct financial advice as their main regulated activity. It does not include firms that conduct some financial advice but not as their main regulated activity. ii Data is not available as at 31 December 2012, so data at 30 September has been used instead, being the nearest available date at which equivalent data is available.

5 2.2. Legal status (directly authorised firms) 2 The vast majority - over 80% - of directly authorised financial advice firms operate with limited liability (as either a Limited Company or a Limited Liability Partnership - LLP). This percentage has increased steadily over the last six years, but nevertheless 16% of directly authorised firms are still operating with unlimited liability as sole traders or partnerships (Figure 3). Figure 3: Legal status of Directly Authorised firms 2.3. Number of advisers The next two charts show the number of advising staff iii working in Financial Adviser 3 firms (Figure 4) and the average number of advisers per directly authorised firm iv (Figure 5). Figure 4: Number of staff advising iii Defined as CF30 staff within firms that have an FCA primary category "Financial Adviser". Does not include any CF30 staff in firms whose primary category is not Financial Adviser. iv The averages are calculated in relation to the number of directly authorised firms only, and not appointed representatives, i.e. by dividing the total number of CF30 staff by the number of directly authorised firms. Directly authorised firms submit consolidated data which includes figures for their ARs. 5

6 Figure 5: Average number of advising staff per firm The FSA/FCA has also published data showing the number of advisers based on Professional Standards Data submitted by firms. The chart below (Figure 6) includes the estimates of the numbers of Retail Investment Advisers that the FCA used when implementing RDR: Figure 6: Number of advisers 6

7 2.4. Financial position 4 The following tables show the consolidated revenue v generated from regulated retail investment business (Figure 7), non-investment insurance (Figure 8) and mortgages vi (Figure 9) by Financial Advisers. There were steady increases in investment and insurance business in 2013, and as would be expected, there was a switch from commission to fees for investment business vii. There was a significant drop in the revenue reported for mortgage business in 2013 due to one large firm leaving the dataset. Figure 7: Consolidated regulated business revenue - Retail investments Figure 8: Consolidated regulated business revenue - Non-investment insurance v The revenue figures are for firms with FCA primary category "Financial Adviser" only. It does not include any revenue generated by firms whose primary category is not Financial Adviser. vi The figure for "Other income" included in mortgage business increased significantly in 2010 as a result of one large firm joining the dataset, and decreased significantly in 2013 when one large firm left the dataset. vii As firms submit their RMAR data at different times throughout the year (depending on their reporting period) the figures submitted in 2013 may include revenue earned in Therefore some pre-rdr commission received in 2012 will be included in the 2013 RMAR data, as well as trail commission received in

8 Figure 9: Consolidated regulated business revenue - Mortgages Figure 10 below shows the consolidated figures for all types of regulated business reported by Financial Advisers. The figures for mortgage business increased significantly in 2010 as a result of one large firm joining the dataset. It then decreased significantly in 2013 when one large firm left the dataset. It should also be noted that commission from investment business is reported on a net basis whereas mortgage and general insurance commission is reported gross. The chart is therefore an amalgamation of differing types of income. Nevertheless it gives an indication of the trends within the market - in 2013 reported revenue was marginally up, by just over 1%. Figure 10: Consolidated revenue - All regulated business 8

9 Figure 11 below shows the proportion of income from investment, insurance and mortgage business viii and reflects the decline in revenue from mortgage business reported in 2013 due to one large firm leaving the dataset. Figure 11: Proportion of income from investment, insurance and mortgage business The charts below show the average revenue figures in relation to (a) the number of directly authorised financial advice firms ix and (b) the number of advising staff (as defined earlier) for retail investment business (Figure 12), non-investment insurance (Figure 13) and mortgages (Figure 14), with Figure 15 showing the averages across all types of business x. Figure 12: Average revenue earned per annum - Investment business viii The figures for mortgage business increased significantly in 2010 as a result of one large firm joining the dataset and decreased significantly in 2013 when one large firm left the dataset. ix Directly authorised firms submit consolidated data which includes figures for their ARs. x The figures for mortgage business increased significantly in 2010 as a result of one large firm joining the dataset and decreased significantly in 2013 when one large firm left the dataset. 9

10 Figure 13: Average revenue earned per annum - Non-investment insurance business Figure 14: Average revenue earned per annum - Mortgage business 10

11 Figure 15: Average revenue earned per annum - All regulated business The consolidated profit figures (Figure 16) are from ordinary activities before tax and are in respect of all business generated by firms with an FCA Primary category "Financial Adviser". However it should be noted that these figures are shown before dividends, which in the case of smaller director owned businesses may be used to pay remuneration rather than paying a salary. The profit figures may not therefore reflect the full costs of running financial adviser firms. Figure 16: Profits before tax 11

12 The average profit figures below (Figure 17) are for all types of business generated by firms with an FCA Primary category "Financial Adviser" (as shown in Figure 16 above) and are shown in relation to (a) the number of directly authorised financial advice firms xi and (b) the number of advising staff (as defined earlier). The comments above about dividends (see Figure 16) apply to these figures as well. Figure 17: Average profit earned per annum The chart below (Figure 18) shows profits before tax as a percentage of total revenue from all regulated business xii for firms with FCA primary category "Financial Adviser". The comments above about dividends (see Figure 16) apply to these figures as well. Figure 18: Profits before tax as % of total regulated business revenue 12 xi Directly authorised firms submit consolidated data which includes figures for their ARs. xii The figures for mortgage business increased significantly in 2010 as a result of one large firm joining the dataset and decreased significantly in 2013 when one large firm left the dataset.

13 The chart below (Figure 19) shows retained profits (i.e. profits after tax and dividends) for firms with FCA primary category "Financial Adviser". Figure 20 shows retained profits as a percentage of total regulated business revenue. Figure 19: Retained profits Figure 20: Retained profits as % of total regulated business revenue 13

14 Figure 21 shows the trends over time for both profits before tax and retained profits. Figure 21: Profits before tax and retained profits 2.5. Business split and income breakdown The chart below shows the volume xiii of protection and retail investment product xiv sales by Personal Investment firms xv (Figure 22) 5 as reported in the FCA's Product Sales Data reports for Protection ISAs / OEICS / Investment Trusts Bonds Annuities & drawdown Pensions Figure 22: Protection and retail investment product sales volumes 14 xiii Excluding business transacted via platforms. xiv Excludes mortgage business. xv Defined by the FCA as Arranging-only Intermediary (except Stockbroker), Financial Adviser & Independent Financial Adviser.

15 NMG survey 6 data shows the distribution of advisers' income between commission and fees (Figure 23) and between independent and restricted advice models (Figure 24). Figure 25 shows the split between different payment methods. Other \ Don't know Commission on non-investment business Pre RDR investment business Post RDR ongoing adviser charge / fee Post RDR initial adviser charge / fee Figure 23: Income breakdown Restricted advice Focused advice Independent Financial Advice Figure 24: Source of income 15

16 Other \ Don't know Commission on non-investment business Non commission payments facilitated via a wrap / funds Commission on pre RDR investment business Non commission payments facilitated via a product Payments made direct by clients via debit card, etc Figure 25: Payment method 2.6. Advised versus non-advised product sales 7 The charts below show how the proportion of product sales on a non-advised basis has grown over recent years. Figure 26 shows the figures for all firm types, Figure 27 for Personal Investment firms. Figure 26: % advised vs non-advised sales (all firm types) 16

17 Figure 27: % advised vs non-advised sales (Personal Investment firms) 17

18 3. Client base 8 NMG has been monitoring the average number of clients (active or reactive) that adviser firms have post-rdr. Figure 28 shows the figures for each quarter throughout during this time the number of clients has remained broadly steady at around 200 of which around 120 are active. Figure 29 shows that whilst the number of new transactional clients fell during the year, the number of new relationship clients increased. Figure 28: Average number of clients per adviser firm post RDR Figure 29: Movements in number of clients 18

19 4. Savings measures 4.1. UK savings ratio (%) ( ) 9 Figure 30: UK savings ratio (%) 4.2. Number of long term business policies in force (millions) 10 Figure 31: Number of long term business policies in force 19

20 4.3. Quarterly gross sales of UK domiciled unit trusts and OEICs by distribution channel xvi 11 ( million) (2012 and 2013) Figure 32: Quarterly gross sales of UK domiciled unit trusts and OEICs 4.4. Sales of stocks & shares ISAs (net of repurchases) ( billion) 12 Net sales comprise total sales minus repurchases (transfers out or switches), thus the figures can result in a negative figure or outflow. Figure 33: Sales of stocks & shares ISAs 20 xvi Direct includes sales forces and tied agents, private clients and other direct to investor sales without intermediation; "Other Intermediaries" includes Wealth Managers, Stockbrokers and IFAs.

21 4.5. Funds under management, held in stocks & shares ISAs ( billion) 13 Figure 34: Funds under management, held in stocks & shares ISAs 21

22 5. Sources 1 FSA sector statistics for retail intermediary firms, September Aggregated FCA RMAR data for firms with Primary Category "Financial Adviser" for ibid 3 Aggregated FCA RMAR data for firms with Primary Category "Financial Adviser" 4 ibid 5 FCA Retail Investments Product Sales Data FCA Pure Protection Contracts Product Sales Data NMG Consulting's Financial Adviser Census* Quarterly Trends, December FCA Retail Investments Product Sales Data NMG Consulting's Financial Adviser Census* Quarterly Trends, December Office for National Statistics 10 Association of British Insurers 11 Investment Management Association 12 ibid 13 ibid * For more information about NMG s Financial Adviser Census, please contact David Burns at NMG: david.burns@nmg-group.com

23 Association of A F A Professional Financial Advisers About APFA The Association of Professional Financial Advisers (APFA) was launched in September Our role is to effectively lobby the Treasury, FCA, government, the EU and other opinion formers and policymakers to ensure the regulatory and business environment is positive toward members. It is APFA s objective to play a critical but constructive role within the regulation process - offering insights from the front line of the market. APFA is a non-commercial, not-for-profit trade body. It exists solely to bring about a better business environment for our members so they can continue to serve their clients. The Financial Adviser Market: In Numbers Edition 2.0 Published by APFA April 2014 APFA 26 Throgmorton Street London EC2N 2AN Telephone: info@apfa.net Web: twitter.com/official_apfa Ref: APFA-FAM2.0-14