Transforming the Financial Advice Industry into a Holistic Financial Planning Profession

Centralised Investment Propositions: The New Norm

In the UK, approximately 90% of financial advice firms have adopted centralised investment propositions (CIPs). These are standardised investment strategies or portfolios managed either by the firm itself or a third-party provider. The primary goal is to streamline the investment process and ensure consistency in the advice given to clients. This high adoption rate highlights a trend towards efficiency and uniformity within the industry. Firms can better manage regulatory requirements, reduce costs, and enhance the client experience by offering more structured and potentially less risky investment options.

However, this also means that many firms function both as manufacturers and distributors, creating a vertically integrated model. The commercial focus of these firms often leans towards asset gathering to generate fees, rather than offering impartial financial advice. This model includes propositions such as pension consolidation, pension freedoms, cost-saving strategies like passive or dimensional investments, ESG overlays, investment risk rebalancing, and improved administrative services. The aim is often to move assets into the CIP for various commercial reasons.

This trend has led to a shift in the industry, where asset hoovering has become a significant activity. Savvy advisers have taken advantage of recurring revenues, selling their businesses to consolidators at peak valuations. However, the industry is now facing scrutiny under the consumer duty review and the retirement income review, with firms being asked to refund fees for services not delivered.

Wealthy Baby Boomers: The Core Client Base

A significant proportion of financial advisers’ clients in the UK are wealthy baby boomers, estimated to be around 60% to 70%. Born between 1946 and 1964, baby boomers have accumulated substantial wealth through savings, investments, and pensions. As they approach and enter retirement, they seek professional advice to manage their assets, plan their estates, and ensure financial security.

Boomers are the wealthiest retired generation, having typically enjoyed long careers with defined benefit occupational pension schemes. Many senior directors were bought out in their 50s with generous pension enhancements, resulting in potentially 40 years or more of pension benefits. However, this, combined with adverse market conditions, has come at the expense of future generations, leading to the closure of many pension schemes to new members.

Onboarding Thresholds: A Barrier for Many

Around 40% of UK financial advice firms have set thresholds of £100,000 or more of investable assets for onboarding new clients. These thresholds ensure that firms allocate their resources to clients who can generate sufficient revenue, allowing for high service levels and profitability. This practice also indicates a focus on clients with more complex financial needs requiring comprehensive advice.

However, the actual figure might be higher as firms may not disclose hard thresholds, allowing discretion for client referrals, family members, or young high-earning professionals.

The Advice Gap: A Growing Concern

According to the Office for National Statistics (ONS), approximately 80% of UK households have less than £100,000 in investable assets. These include savings, stocks, bonds, and other financial instruments that can be easily converted to cash. Investable assets represent around 14% of the total wealth of UK households, with total wealth also including property, pensions, physical assets, and other forms of wealth.

This combination of investable asset thresholds and wealth levels results in over 80% of the UK population being underserved by the adviser community, often referred to as the advice gap. The needs of the served wealthy clients differ significantly from those of the underserved.

The Future of Financial Advice

The wealthy, often retired baby boomers, typically have surplus assets and can afford to adopt a “ski-ing” strategy (spend kid’s inheritance) or leave a legacy. They struggle to shift from an accumulation to a decumulation mindset, requiring advisers to help them adopt a hedonistic “you only live once” (YOLO) attitude.

In contrast, younger generations (Gen X, Y, Z) and future generations face different financial challenges. With smaller defined contribution pension pots, they cannot afford early retirement and must remain economically active into their later years. Their financial planning priorities include generating sustainable income streams, reducing expenditure, paying down debt, short-term savings, and protecting income from health or death risks.

Financial professionals supporting these generations cannot rely on a percentage of assets under management due to smaller savings pots. Instead, planning must be more holistic, focusing on all assets and leveraging intangible assets such as goodwill, people networks, skills, and know-how to boost incomes. Ensuring spiritual, social, mental, and physical well-being can extend economic activity, while diverse networks and skills can protect income from disruptions caused by technological advancements and globalisation.

Therefore, the future financial professional must focus on creating wealth in every aspect of a client’s life, including mind, body, heart, spirit, and bank account. The current asset-gathering model, driven by fees from managing large portfolios, is unsustainable for the majority of the population. The statistics from the ONS indicate that most households do not have, and will not have, the level of investable assets that justify the traditional fee structures based on asset management. This model inherently excludes a significant portion of the population from receiving financial advice, thereby exacerbating the advice gap.

By transitioning to a fixed-fee, holistic financial planning profession, advisers can provide more inclusive and comprehensive services. This approach allows them to assist clients in all areas of their financial life, from generating income and reducing debt to protecting against risks and improving overall well-being. Such a model aligns with the realities faced by younger generations who need advice on creating sustainable income streams and leveraging intangible assets rather than just managing existing wealth. This shift will help bridge the advice gap and ensure that financial planning services are accessible to a broader segment of the population, fostering a more equitable and sustainable financial future.

To future-proof their practice, financial advisers must transition from an asset-gathering industry mindset to a holistic financial planning profession. This shift requires embracing a comprehensive approach that addresses all aspects of a client’s life, including mind, body, heart, spirit, and financial well-being. By focusing on creating wealth in every area of a client’s life, advisers can provide more inclusive and meaningful services. This transformation is essential to bridging the advice gap, meeting the diverse needs of younger generations, and ensuring the long-term sustainability and relevance of financial advisory practices in an evolving economic landscape.

Q&A: The Financial Advice Industry

Q: What is a centralised investment proposition (CIP)?

A: A centralised investment proposition (CIP) is a standardised investment strategy or portfolio managed by a financial advice firm or a third-party provider. It is designed to streamline the investment process and ensure consistency in the advice given to clients. CIPs help firms manage regulatory requirements, reduce costs, and provide a more structured and potentially less risky investment option for clients.

Q: Why do most UK financial advice firms use CIPs?

A: Approximately 90% of UK financial advice firms use CIPs because they enhance efficiency and uniformity within the industry. CIPs allow firms to manage regulatory requirements more effectively, reduce operational costs, and improve the client experience by offering standardised and consistent investment strategies.

Q: What is the commercial focus of firms using CIPs?

A: Firms using CIPs often focus on asset gathering to generate fees, rather than providing impartial financial advice. They leverage propositions like pension consolidation, pension freedoms, cost-saving investment strategies, ESG overlays, and improved administrative services to move client assets into CIPs for commercial reasons.

Q: Who are the primary clients of UK financial advisers?

A: The primary clients of UK financial advisers are wealthy baby boomers, estimated to comprise 60% to 70% of their client base. Baby boomers, born between 1946 and 1964, have accumulated substantial wealth through savings, investments, and pensions and seek professional advice as they approach and enter retirement.

Q: What is the typical wealth situation of baby boomers?

A: Baby boomers are the wealthiest retired generation, often having enjoyed long careers with defined benefit occupational pension schemes. They frequently retired with generous pension benefits, sometimes resulting in industry consolidation and pension scheme closures to new members.

Q: What are onboarding thresholds in financial advice firms?

A: Onboarding thresholds are minimum asset levels set by financial advice firms for new clients. In the UK, around 40% of firms have thresholds of £100,000 or more. These thresholds ensure firms allocate resources to clients who can generate sufficient revenue, allowing for high service levels and profitability.

Q: What is the advice gap in the UK?

A: The advice gap refers to the significant portion of the UK population that is underserved by the financial adviser community. Approximately 80% of UK households have less than £100,000 in investable assets, and investable assets represent about 14% of total household wealth. This gap exists because many advice firms set high asset thresholds, excluding a large segment of the population from receiving financial advice.

Q: What are the financial challenges faced by younger generations (Gen X, Y, Z)?

A: Younger generations face challenges such as smaller defined contribution pension pots, the need to remain economically active into later years, and the necessity of generating sustainable income streams. They prioritise reducing expenditure, paying down debt, short-term savings, and protecting income from health or death risks.

Q: How should financial professionals support younger generations?

A: Financial professionals should adopt a holistic planning approach, focusing on all assets and leveraging intangible assets such as goodwill, networks, skills, and know-how to boost incomes. They should also ensure spiritual, social, mental, and physical well-being to extend economic activity and protect income from disruptions.

Q: What changes are needed in the financial advice industry?

A: The financial advice industry needs to transition from an asset-gathering model to a fixed-fee, holistic financial planning profession. This shift will make financial planning services more inclusive and comprehensive, addressing the needs of a broader segment of the population. Advisers should focus on creating wealth in every aspect of a client’s life, including mind, body, heart, spirit, and bank account, to bridge the advice gap and foster a more equitable financial future.