Two big U.S. players in the financial advisory industry hope to cash in on a major regulatory change in the United Kingdom that is expected to drive a sizable chunk of traditional commission providers out of business and force established professionals to upgrade their skills.
Officials at
Raymond James Financial Services Inc. and Pershing LLC think that they have the know-how to provide the U.K. market with the kind of independent, fee-based, open-architecture platforms that are thriving here.
The 28,000 retail advisers in the U.K. could drop to 20,000 or fewer by the start of 2014, according to the London office of Ernst & Young LLP.
Behind this potential plunge is the regulatory scheme called the retail-distribution review, which takes effect Jan. 1. Under the regime, advisers must make clear to clients whether they offer independent advice or are limited to proprietary products.
Investors will choose whether to pay upfront commissions or asset-based fees. Commissions paid by product sponsors directly to advisers — long a staple of the U.K. market — will be banned.
The changes are forcing U.K. advisers to make the transition from sales to advice, and many are going independent or looking for new providers to facilitate the move. But many others are unable or unwilling to adapt to the regulatory climate, Malcolm Kerr, a director at Ernst & Young's financial services division, said in a report last month.
So with many advisers expected to leave the business, it is possible that “the supply of advice will not be equal to the demand,” Mr. Kerr wrote.
That is why
Raymond James and Pershing see opportunities in the United Kingdom. The regulatory change is “a positive for us,” said Cynthia Poole, director of relationship management for
Raymond James Investment Services Ltd. in London.
Raymond James Investment Services has been recruiting independent U.K. advisers since 2001 and has £2.97 billion ($4.77 billion) in client assets. It targets stockbrokers, investment managers and independent financial advisers (known as IFAs) with at least £25 million under management.
Pershing, too, sees the market coming its way.
“We see some of those [U.K. advisers] spinning off and becoming their own [firms], and moving away from the commission model,” said Frank LaSalla, managing director at Pershing, who is responsible for the firm's foreign operations.
Its U.K. unit, Pershing Ltd., provides fully disclosed clearing, as well as the Pershing Advisor Solutions brand, to target larger U.K. advisers, typically money managers or aggregators with £200 million or more under management. Pershing does not disclose its U.K. asset levels.
Although the U.S. firms may be well-positioned, they face head winds.
For one thing, the number of independent platform providers has expanded to the point where the market looks overcrowded, Ernst & Young said.
Assets on platforms have quadrupled in the past five years, and E&Y expects to see growing pressure on margins and
consolidation. At the same time, “the [U.K.] industry remains concerned about the cost of regulation, which is skyrocketing,” Ms. Poole said.
BALK AT PAYING
Shiv Taneja, London-based head of European research at Cerulli Associates Inc., wonders if U.K. investors will balk at paying for advice, which they have always perceived as free.
Despite the risks, the Americans think that they are well-positioned to compete in a growing IFA market, as well as for the traditional stockbroker and investment manager breakaway advisers — similar to the registered investment adviser segment that they serve in the United States.
“Increasingly, we see these [stockbroker] firms centralizing their investment approach, where the relationship manager manages the relationship, and the investment work is done elsewhere,” in an attempt to make the client dependent on the firm, said David Hazelton, Raymond James' head of U.K. recruiting.
That trend, plus constant mergers and takeovers, is driving stockbrokers to go independent, he said.
The biggest competitive threat for U.S. firms could end up coming from one another.
Raymond James uses Pershing to clear its U.K. business and is “quite sensitive if they start to approach some of our [adviser] clients,” Ms. Poole said.
“At this point, there's not a lot of overlap … But we're concerned.
Pershing is sizable,” Ms. Poole said.
“We have a relationship with Raymond James. We don't view them as a competitor,” Mr. LaSalla said.
“We would not speak to their advisers … Our market is the larger [asset management] firms.” he said.
The U.K. market has been more segmented than the one in the U.S., with insurance companies, fund managers, banks, IFAs, and higher-end stockbrokers and investment managers all vying for customers.
Mr. Kerr figures that only about 20% of advisers have switched to fee-based investment advice.
The retail-distribution review also requires advisers to meet a qualifications standard that is roughly equivalent to the first year of an undergraduate degree.
“There's been a significant effort to increase professional [standards] if you're giving advice to clients, and the [regulatory changes] have been weeding out some of the smaller and lesser qualified” providers, Ms. Poole said.
The professional requirements are “more akin to a chartered financial analyst” designation than simply passing a licensing test, she said.
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