The mood in the advice market is both optimistic and confident. It is apparent that there are several headwinds for the financial advice market. Opinions, while positive, are heavily influenced by general economic confidence. It is worth noting that our survey was conducted at the end of 2015.
Those headwinds are first and foremost current and predicted economic conditions.
The Financial Advice Market Review and the inexorable rise of an advice gap also create challenges. ‘Not getting advice’ is a major problem, which the FAMR sets out to address.
This gap has been exacerbated with more advisers asking for a minimum portfolio before advising a client, and those minimum portfolio sizes rapidly steeply since 2011.
This response was natural given the shift from commission to fees-based advice. It will create future problems for the sector as younger investors with inevitably smaller portfolios, never acquire the advice habit and identify alternative solutions and advice sources as their portfolios grow.
In turn, this stimulates another headwind.
The rise of digital-native investors and the growing power of online algorithms or ‘robo-advice’ represent a clear and present danger (and opportunity) to advisers. The financial advice business model, at the most simplistic and reductionist level, is a very well-informed, carbon-based decision-tree.
Sadly, algorithms get it wrong all the time and the nuance of great advice from experienced advisers will be lost for the majority.
Whatever challenges the advice market faces, these issues are magnified in sustainable investment. As the advice gap opens up, more people will be offered generic products that may or may not meet financial goals but will almost certainly ignore social and environmental issues, making those poorer investors more susceptible to predictable shocks.
We are not seeing evidence of a tipping point for sustainable retail investment. 73% of advisers may get sustainable investment advice requests but this is only from 14% of their clients (the lowest figure since 2012). This means the market size was just over 10% in 2015. Those clients then put 59% of their portfolio in sustainable funds.
In 2014, 87% of advisers got sustainable investment advice requests from 37% of their clients. A market size of just over 32%. Those clients then put 55% of their portfolio in sustainable funds.
It would be depressing for the industry if 2014 represented a high water mark for sustainable investment advice, just as the issues the investment strategy addresses become more pressing.
A sustainable investment industry that is still talking to itself?
The Ethical Investment Association – the industry body for ethical financial advisers – has just 56 members. There are 14,550 registered financial advice firms in the UK, and a third provide ethical investment advice. That is an enormous membership opportunity if the EIA seized it with both hands.
There has been consolidation in the market. While this is a positive development for the firms themselves, fewer firms means a quieter voice for the industry as a whole.
Good Money Week creates positive (and negative) coverage for a week but hasn’t broken through to the mainstream. It needs to.
We remain optimistic but concerned
The COP21 dividend, post-Silent Spring generation as investors and senior managers, divestment and increasing signals from the environment that we’re in trouble, have made a compelling case for sustainable investment. Advisers need to be part of the solution, providing well informed sustainable investment advice.