Online Wealth Management and Independent Financial Adviser (IFA) Dynamics in the UK

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Within the independent financial planning and wealth management sectors in the UK, the distribution of financial advice, products  and services traditionally occurs through IFA Networks that provide the licencing, compliance, insurance, training and support services to their IFA Authorised Representatives (ARs). In 2015, there were approximately 24,000 IFAs (from 14,500 financial advice firms) in the UK with approximately 64% operating within an IFA Network.

From an industry perspective, the recent implementation of the Retail Distribution Review (RDR) reforms has significantly increased the compliance burden on IFAs and disrupted their remuneration model away from commission based product recommendations and towards an asset allocation framework. This has made the incumbent business model of IFAs less profitable, viable and scalable particularly when servicing low-margin, high-risk clients (i.e. ‘C’ & ‘D’ clients) or those generating trailing commission fees.

Within the context of online wealth management, the challenge for this business model is the small gross margins due to high customer acquisition costs (i.e. large B2C marketing expenditure), small average investment amounts per user and large fees absorbed in brokerage and to financial product providers.

Despite the challenges for online wealth management platforms (particularly those with a ‘business-to-consumer’ i.e. B2C model), the market dynamics are creating significant opportunities for technology and new operating models to dramatically improve productivity and the overall client experience in the sector.

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