The adviser size premium: why small is beautiful and big is fugly

As a founder of a small advice firm who’s just read that we’re heading for extinction, I feel compelled to respectfully disagree.

Firstly, I’m not entirely sure I accept the premise that there’s evidence small firms are on the way out.

Advice is still a cottage industry and small firms are well represented in the numbers. The Financial Conduct Authority’s latest retail intermediary market data shows a significant but not huge fall, from a high baseline.

Those with one to five advisers still made up 88% of all directly authorised firms in 2023.

So, I suppose the next question is: is there reason to believe small firms have some strategic disadvantage compared to big ones that makes them more likely to vanish in the years ahead? I’d say the relative merits tend strongly in the opposite direction.

As someone who’s been knocking around the industry for 20 years, working my way through mostly big firms (and mostly “good” big firms), I can tell you confidently the small ones are where most of the innovation and the best client outcomes are concentrated.

My tiny little firm is the best I’ve worked at – and not just by a bit.

There’s always a lot of chatter about tech and I suppose big firms with big budgets do have theoretical first-mover advantage with innovative solutions. In practice, however, they are also held back by sclerotic compliance and dysfunctional politics.

Our industry is also fundamentally analogue, which isn’t a bad thing. Tech just seems to try to solve problems round the edges. Our best work isn’t what goes on when we’re slickly onboarding clients, running platform reporting, benchmarking portfolios. Clients value these things – but are they a big part of what they value?

I say no. It’s the interactions we have with them over the life of a relationship, where we understand and care about them. The rest is highly commoditised, and largely invisible unless it goes spectacularly wrong.

Anyway, access to established tech is well democratised. A tiny one-adviser firm can feasibly stack the best platform, cashflow planning and analytics software, and insource investment governance which beats the pants off everything out there, to deliver gold standard services to clients while controlling the biggest variable in all this – adviser time.

I am yet to see a big advice firm delivering this combination of good tech (table stakes) and good service (the valuable part).

I understand clients’ desire for a “soup to nuts” service experience (except in a restaurant setting, obviously) but I disagree tech is a silver bullet that’s going to magically solve the lack of genuine client care that’s endemic to big financial services.

I don’t even think it’s what most clients want.

Mine skew much younger than average and I talk to them regularly about what good looks like. Their answer is never about seamless tech, single application onboarding or whizzy client portals.

They often talk about having the kind of trusted adviser in their life that traditional professions have stopped trying to be. They want to partner with someone – not a set of processes or a brand – for the long haul. They want a service that flexes in response to their life stage and shifting priorities. They want true accountability.

Tellingly, a lot of these clients come to me from robo advisers that were also meant to put me out of business ages ago. Turns out the robos were mostly providing what younger clients were supposed to want, not what they wanted.

At the risk of labouring my point, another source of work is clients who’ve been through the aggregation mangle.

When I explained how we work to a new client recently, she said, “that sounds great, and a lot like what I used to have”.

She originally worked with a small local IFA, who had made her feel valued and looked after for many years. Then he exited. Enter the consolidators, with their strategically aligned platform provider, their team structure, their nationally recognised brand, their 30 underlying funds and 2.3% TER. She wasn’t a particularly interested investor. But she wasn’t daft either. And she knew what less-for-more felt like.

What’s my point? Two things. First, that it took me 20 years to truly understand the optimum model for clients looks a lot more like a good, dare I say, old-school IFA than the focus-group designed, centralised-team-based alternative many big firms think is the thing.

Second, that no amount of slick tech and fat budgets can convince a client they are getting something better when it feels worse. My clients are smart consumers.

In a lot of industries, you either pay a premium for someone small and local, who will treat you with care, or you buy from a big, cheap brand that won’t. It’s false equivalence to suggest this is the same in advice.

Horrible supermarkets may not be everyone’s friend in the value chain, but they are the consumer’s friend. Can big financial services say the same thing?

The day big advice firms start undercutting me on cost while delivering a product that’s anywhere near as good as what we do is the day I’ll worry about small firms going extinct.

This article originally appeared in Money Marketing, October 2024