It’s sometimes said that a Poor Financial Planner is a poor financial planner. The economic impact of the Covid-19 pandemic has been tough for businesses up and down the country, including financial planning businesses.
According to a new survey from the Financial Conduct Authority, around 4,000 businesses in the retail investments sector, including financial advisers, face a significant risk of failure this year.
What’s more, nearly a third of those businesses could cause consumer harm, if they collapse.
In this video and blog, what’s putting financial firms at risk in 2021 and the questions you need to ask your financial adviser to make sure they will still be in business at the end of this year.
According to the Financial Conduct Authority, the Covid-crisis has put around 4,000 investment businesses at heightened risk of failure this year. The regulator sent out a survey to almost 23,000 regulated businesses to understand their financial resilience levels during the pandemic, concluding that the pandemic may cause “significant numbers of firms to fail over the next 12 months”.
Financial firms at risk of collapse in 2021 include insurance intermediaries and brokers, payments and electronic money firms, and investment management companies. According to the FCA, these businesses experienced the most significant fall in cash and assets during the pandemic. Without these cash and assets, the businesses are at greater risk of collapse.
Sheldon Mills, who is the FCA’s executive director in charge of consumers and competition, said the situation was “unprecedented – and rapidly evolving”, saying: “A market downturn driven by the pandemic risks significant numbers of firms failing. At the end of October we’ve identified there are 4,000 financial services firms with low financial resilience and at heightened risk of failure, though many will be able to bolster their resilience as and when economic conditions improve.”
He added: “These are predominantly small and medium-sized firms and approximately 30% have the potential to cause harm in failure.”
In line with businesses across the country, almost 60% of the regulated firms surveyed by the FCA said they expected their income to drop because of the pandemic. Nearly 700 of the regulated firms thought their income would fall by more than two-thirds. That’s a serious drop in income for a regulated business, which is likely to have a lot of fixed costs to cover.
Clearly, the FCA is worried more about the impact of these businesses failing, than about the businesses failing themselves. When publishing the survey data, they said that disorderly failures could hurt consumers by reducing competition in the sector, and harming “the effectiveness of markets, and overall confidence in the UK’s financial system”.
Last year, we completed two of these financial resilience surveys from the FCA, in addition to our usual twice-yearly regulatory data returns, which include details of our financial adequacy. When the FCA published data from its first survey, which was carried out pretty early on in the pandemic, they were talking about hundreds of financial services businesses at risk of collapse. To be talking about almost 4,000 this time is a big step up.
From our perspective at Informed Choice, the findings in this survey are not a concern for our business, our staff or clients. We’re in great shape financially, with no debt, healthy capital reserves in the bank, and a business that’s been consistently profitable every single year since we started in 1994. In fact, 2020 was another record year for us in terms of turnover and profits, and we exceeded our expectations around new client acquisition.
But, I recognise that things are tough for many of our peers. This FCA survey confirms that. We also see regular updates from a data research firm called Plimsoll, which carries out analysis of Companies House data to understand the financial strength of the sector. It’s rarely happy reading, as there’s also a decent proportion of firms that aren’t doing great in financial terms.
As a client of a financial adviser, you need to do your due diligence. That includes understanding the financial strength of your adviser. Ask them for a copy of their unabbreviated company accounts. The company accounts that most advisers submit to Companies House, that you view for free online, are abbreviated under the small companies exemption.
But your financial adviser shouldn’t have anything to hide, and should be willing to send you their latest full accounts.
With those accounts in hand, look for their net profit for the past couple of years; this should be a positive figure. Look at their retained profits, make sure there are some. Check for any debt or liabilities which aren’t covered by assets. Compare their annual profits to the dividends being withdrawn by shareholders; you want to be sure that they aren’t extracting every last penny from the business, but instead reinvesting for the future.
If you’re a client of a regulated financial adviser in the UK, you can take some comfort that regulatory requirements offer a degree of financial protection. Regulated firms have to maintain a minimum level of capital adequacy; typically cash in the bank, reported to the FCA twice a year, and reported immediately if they breach the requirement.
Regulated firms also have to maintain professional indemnity insurance, backing up their advice. Although often these policies will cease to cover the adviser, and therefore their client, in the event the company goes bust.
I started this video by saying that a poor Financial Planner is a poor financial planner. When looking for the right adviser for you, there’s nothing wrong with getting personal and asking them some searching questions about their personal financial position. How much debt do they have? What assets do they own? What’s their net worth?
Probably most importantly, do they have their own Financial Plan in place and what progress are they making towards that plan.
If these FCA survey findings materialise in 2021, there are going to be fewer financial advisers in business at the end of the year. There are already too few to go around, and demand for financial advice is consistently rising, as more of the wealthy post-war baby boomer generation reach retirement age, often with complex financial advice needs.
As well as it becoming harder to find a financial planner with capacity in the future, another consequence of reduced supply is a higher cost associated with advice. That’s at a time when the regulator and various commentators are suggesting we charge less for what we do. But basic economics tells us that in a market with falling supply and rising demand, prices will rise.
Another reason the cost of financial advice will head up as firms fail, is to cover the higher cost of regulatory expense and levies paid to the Financial Services Compensation Scheme, to compensate the clients of failed businesses. It’s a vicious circle.
When was the last time you looked at the books of your financial adviser? Are they at risk of collapse in 2021?