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LESSONS FROM THE US – HOW UK IFAs AND ASSET MANAGERS CAN BENEFIT FROM THE US

Aug 28, 2007

Following the release of JPMorgan Asset Management’s (JPMAM) in depth IFA research at the beginning of August, JPMAM has not only illustrated how the outlook for sector is not necessarily one of doom and gloom, it also believes that lessons can be learnt from the US advisory sector. The IFA report commissioned by JPMAM entitled: ‘Surviving the storm,’ surveyed over 200 UK IFAs and revealed what they believe to be the real pressures facing them in the coming years. In 2005, JPMAM also conducted a major survey into the state of the US advisory sector in a bid to determine the key forces that will shape the advisory industry over the next few years and the attributes of advisory firms that will prosper in the future and those that will not.

In the two major research initiatives* JPMAM revealed that despite the US advisory market being much larger, parallels can be drawn between the two nations:

• the need for personal pension provision due to limited state retirement support means individuals have become more reliant upon advice and recognised the need for sophisticated advice;
• there is a widespread adoption of equity investment and quite complex savings products;
• the concept of a highly-regulated independent advice sector is well established, with a history stretching back three decades.

What is clear on both sides of the ocean is that investors require greater clarity and simplicity in an ever-complex marketplace; a greater clarity of where and at what cost advice can be harnessed and further simplicity and a greater understanding of the investment tools themselves as well as their respective charging structures.

The similarities are also mirrored in the struggles faced by UK and US intermediaries, with key lessons to be learnt from how the US advisory market has evolved. Having enjoyed something of a golden period for nearly two decades, the US market faced pressures in the late 1990s that are only too familiar to today’s UK IFAs. These pressures are still being faced in the US and should be noted:

• New entrants to the market including wealth management services of banks and insurance firms;
• Traditional competitors repackaging – blurring and confusing the advice market for consumers;
• Technology and the ability to embrace it both helping and polarising IFAs;
• Rapidly rising expectations of key employees at large advisory businesses and demands for equity ownership;
• Pressure on adviser salaries, driven by growing demand for experienced advice professionals;
• Rising operational costs driven by inflation, salary inflation and greater regulatory and compliance costs;

Despite these hurdles, JPMAM believes there is still opportunity for UK IFAs to learn from their US counterparts. Whilst some of the US advisory industry may be in the midst of survival, much of it has not emerged unscathed. The financial advice market in the US is extremely polarized into large successful companies and other smaller, less profitable players with an uncertain future. Even so, smaller niche firms with a focus on value-added client service, a clear business strategy and an efficient business model can survive and flourish. The same can be true in the UK should IFAs ensure their businesses are efficient – particularly ensuring they are profitable enough to overcome the financial pressures on the industry and innovative, in order to protect and develop their customer base.

Jasper Berens, Head of UK Sales at JPMorgan Asset Management comments “Our studies into both the US and UK markets reveal that size is proving to be a key factor in the survival of the US advisory sector. However in the UK, we believe that smaller local advisory firms can still prosper as long as their client proposition is clear and they are operationally efficient – the effects of not being this way in the US may lead to smaller companies being swallowed up by larger players.”

“However UK IFAs should not feel alone in the face of these challenges. One major difference between the UK and the US is the pace of major regulatory changes in recent years. Whilst increased regulation may appear an additional hurdle to overcome, UK and US IFAs benefit from high levels of support from the regulator. Finally it is also up to asset managers to protect their own revenue streams and shoulder some of the burden on UK IFAs, offering training and development tools to allow these businesses to achieve the efficiency and professionalism necessary to survive.”

* UK research conducted in February-April 2007 by Cydonia. It involved telephone-based interviews with more than 200 advisory firms, all of whom derive at least 75% of their revenue from investment-related business.
US Research Back to the Future: The Continuing Evolution of the Financial Advisory Business – JPMorgan Asset Management and Undiscovered Managers, July 2005.

A copy of the UK report can be found at: www.jpmorganassetmanagement.co.uk/ifareport
A copy of the US report can be found at: www.jpmorganfunds.com/pdfs/other/wp-futurefa.pdf