More and more financial advisors are deciding to become specialists, focusing on just a handful of investment products or markets, according to research by Hamilton Spence.

More and more independent financial advisors are becoming specialists, focusing on a handful of investment products or markets, according to research by Harrison Spence.

It follows new rules by the Financial Conduct Authority stating that a firm must either label themselves an independent or a restricted advisor. Independent advisors consider all products from all firms, whereas restricted advisors consider products from several but not all product providers. 

The idea is to avoid scandals such as Arch Cru which saw investors mis-sold products by Capita Financial Managers. Arch Cru investments were marketed as being safe and low-risk, but in fact investors’ money had gone into highly illiquid venture capital and private equity assets. Capita was publicly censured by the FSA for its failures in managing the fund, and in 2012 the FSA brokered a corporate redress scheme. 

The latest data from consultant Harrison Spence">Harrison Spence shows that 15 per cent of IFAs will go down the restricted route in the next year as many firms cannot keep up with costs involved in doing compliance, research and due diligence that are required if they want to keep the independent tag.

“Segmentation is essential for those advisory firms that want to create a solid foundation for strategic decisions and to focus their energies on those clients that are most valuable,” said Brian Spence, founder and managing partner at Harrison Spence.

“Getting a comprehensive view of your client base may well also reveal new growth opportunities. Lighter-touch offerings for lower-value clients are going to be essential for protecting profitability. Finding efficiencies will also lessen the need to turn business away – something no-one likes to do. Arriving at a model where clients of all sizes can be serviced at the appropriate level will be a challenge well worth surmounting,” he added.

The data also shows that just under three-quarters of advisors intend to remain independent for the foreseeable future, despite the FCA’s crackdown on the incorrect use of the label. Yet doubts remain about how much longer these firms can hold out for.

“IFAs have always been fiercely independent and, despite the challenges they face, 74 per cent of respondents plan to remain so,” Spence added. “While this is laudable, we believe that margin pressures will compel many advisors to become restricted, despite a high proportion placing such great store on their independence. Deciding how to retain independence profitably will require real thought and many have yet to fully explore their options.”

The majority of IFAs are carrying on working as they have always done, with 22 per cent of respondents reporting that they’ve had to turn lower-value clients away.