For many older advisers out there the memory of starting their own adviser business may be a little hazy but I think now is the time to put a reality check in place for those ‘young gun’ entrepreneurs who may have been thinking this was a great idea for them to pursue today.
Because financial services regulation today has sounded the death knell for any directly regulated ‘little guy’ fulfilling his or her dream of starting their own, small financial advisory firm.
This is either the intended outcome of RDR and associated manoueverings or an unintended consequence. You, the reader, can decide.
Apart from asking the question “who in their right mind would want to start their own financial advice business” today from scratch, we should examine what is involved in starting one up.
And I mean from scratch, no poaching or walking off with someone else’s client bank from the firm you work at, but by starting with zero clients, a dream, a calling and a vision? Something that most if not all older advisers had to do and will remember only too well.
Let’s park the less than simple task of getting your first client and having them pay you. We need to look at what is involved to even be able to issue that first invoice.
And as Jessie J sang, “Its about the money”, lots of it. You have the idea, you have the plan, you have the qualifications and with that comes the first problem.
You need to be authorised to start and if you are sensible you will realise that outside help is worth paying for to achieve that if you want to avoid long waits. So on top of the £1,500 application fee, a further £3,000 or so should see you on the way.
On the authorisation journey, if you are an incorporated business (setting that up costs too, and, only the insane would take the route of sole trader) you will need to demonstrate that you have money to underpin the business. That is called capital adequacy, changing soon from £10,000 to £20,000.
Current minimum requirements are that firms must hold capital equal to the greater of four weeks EBR (Expenditure Based Requirement) or £15,000, by the end of 2013, the greater of eight weeks EBR or £15,000 by the end of 2014 and the greater of 13 weeks EBR or £20,000 by the end of 2015.
And, here’s the crunch, capital held for regulatory purposes is not working capital, many established small firms may find that their business activities must be restricted to work within the lower budgets available.
So a new firm, with no clients and no revenue has a problem that may stop the dream in its tracks at this stage.
On top of this, further costs will be incurred, assuming you still have the money.
You will need PI insurance.
Ballpark figures from AON based on a new start up (the areas of an advisers work plays a major part for Insurer’s to accurately rate the risk) and so these figures represent the minimum cost per Limit
Limit of Indemnity (Aggregate) £1,600,000 Excess £2,500/£5,000 iro Pension & Investment Premium £1,277
Limit of Indemnity (Aggregate) £1,700,000 Excess £2,500/£5,000 iro Pension & Investment Premium £1,393
Limit of Indemnity (Aggregate) £1,800,000 Excess £2,500/£5,000 iro Pension & Investment Premium £1,500
Limit of Indemnity (Aggregate) £1,900,000 Excess £2,500/£5,000 iro Pension & Investment Premium £1,626
You will need an office of some sort, serviced maybe, working from home was considered acceptable years ago, but for the newly qualified, new model adviser out there, working from home is not exactly the professional image you seek…….. is it?
You will also need:
- Compliance consultant – Lee Werrall at CEI confirms that for a one-man band this could be around £150pm if all is straightforward
- Marketing assistance
- Computer equipment
- Financial modeling and research tools
- Car or transport of some kind
- Back office and support (paraplanner/ pa)
- And a functional interactive website
You will need to have a significant wedge of cash should the FSCS want some money as soon as you start, by way of an additional pot topping-up levy for something that was nothing to do with you.
The FOS will take some of your money too by way of levy.
So it will not take too long to burn £20,000 or more, and still you have no clients.
And no income.
You will need to market what services you offer, differentiating you from those you think you are better than they are at doing the job And that costs too.
This famous song in the title, written by Noel Coward, could very easily be adapted today for the financial services ‘profession’, in particular the line that goes:
”The profession is overcrowded. And the struggle’s pretty tough”.
It is overcrowded, there are only so many high net worth clients and existing firms should not be complacent enough to assume that their clients will be happy as milking cows paying high fund based fees for your services, especially given the noises coming from the FCA. And as trail may soon go too even long established firms could suffer, especially those who have been highly ‘acquisitive’.
Regulation and it’s cost has driven the mass market away from the thought that financial advice is worth paying for and given what surveys suggest consumers would be willing to pay, that is hardly likely to recover the set up costs for ‘Newco’ anytime soon.
If you look at the average hourly rate that advisers in the UK charge, according to our research with GfK and Touchstone, you will have to work a lot of hours at £165 p/h to just cover the start up costs, let alone your own day to day living costs, mortgage etc. And then wait to be paid, either from the client or by provider charging.
Work it out yourself.
The natural outcome from a double whammy of regulation linked to stiff competition will only see falling revenue streams, failing firms being the outcome and the ever increasing cost of regulation being spread across fewer firms as a result will put more out of business.
Regulators today are in many ways a ‘doppelganger’ of the trade unions of the 1970’s, creating unrealistic, restrictive working practices at high cost allowing little or no competition. And we all know how that ended.
Financial services as it stands today has the ability to be the industry that destroys itself by excessive, costly, ill thought out regulation imposed on the wrong people in the wrong way for the wrong reason.
The FCA has recently been trumpeting the fact that adviser numbers have gone up since RDR and the industry should as a result rejoice.
From January 2012 to July 2013 23,406 registered individuals have left the industry and 9573 have joined. Hardly something to shout about.
So, more on that subject soon, all may not be as rosy as the FCA may suggest and the minimal growth of 1231 RI’s will certainly not be made up of very many small, new DA firms starting up.