The extent of loans to advisers joining new firms, and the potential risks such debts could pose to the sector, remain shrouded in mystery, as major advice brands and the regulator remain tight-lipped on the issue. In an ever-increasing battle between national advice brands to acquire new adviser talent, many are offering loans to cover set-up costs or to expand the advisers’ business at their new home. These have hit the headlines for the wrong reasons recently.
A St James’s Place adviser told The Times last month that repaying the debt made them feel like an “indentured servant” under pressure to keep selling. True Potential has also taken an adviser to court demanding repayment of a £1.3m loan – plus 8% interest above the Bank of England base rate – after it alleged the adviser changed former client addresses when they joined the firm.
As of the end of last year, SJP had more than £500m out with its partner firms according to reports. That means the average SJP adviser owes the firm something in excess of £100,000 – paid straight out of their fees.
Rates pressure
The theory of giving advisers financial help to switch allegiance is obvious. Moving can disrupt client relationships. Starting a new business takes money. SJP’s stock price suggested investors didn’t mind the loans as they helped propel growth upwards.
But many of these loans were dished out in an era of ultra-low rates. Partners taking out the loans tied to a 1% Bank of England base rate in 2019 face a very different prospect from those taking them out at 5% plus today – with SJP’s margin on top.
SJP can’t cut that margin without cutting how much it as a group recoups from fees. But it has to balance that with a high rate putting off its own firms from borrowing, stunting growth at individual partner firms.
SJP has a maximum ten-year pay-out period and can lend up to £350,000, according to reports. It declined to confirmed numbers or terms when asked. “Partner loans are assessed through a responsible lending lens,” a spokesperson said.
National advice brands aren’t infinite pools of cash. With rates rising, the appeal of parking their cash somewhere other than an unknown entity — a fresh advice recruit — gets stronger. Market movements aren’t giving their coffers as much of a boost either; coffers that are under pressure from increasing staff and compliance costs. “It depends on how well secured the whole thing is, but the market’s definitely got issues with it,” says one sector veteran.
Treading carefully
If loan repayments are tied to ongoing income, it can theoretically give advisers an incentive to treat clients incredibly well during the transition. It also means advisers don’t instantly have to push to write thousands in new fees, whether that business is right for the client or not.
But the payments have to be structured carefully to give advisers the right incentives. If they feel pressured to pay them back over too short a period, they may start pushing more or riskier sales than they otherwise might have. If you pay the loans off by sales into in-house funds, say, that might start to smell a bit like an inducement. “Should clients be told their adviser has a liability set against their future fees?” financial planner David Hearne asked on X, formerly known as Twitter.
The likes of Benchmark Capital and Fairstone also offer loan finance, according to those familiar with the market. Other independent companies like Rangewell also advertise growth finance for advice firms.
But getting information on the market’s exact exposure remains difficult. Many firms do not clearly break out numbers in their accounts or provide public information on precise terms. Benchmark Capital, True Potential, Fairstone and Rangewell did not respond to a series of questions about their offerings.
As at the end of 2022, Quilter had £34m in loans out, according to a spokesperson. But it declined to disclose the number of firms it had lent to, the rate of the loans, or the margin it made off them. The Financial Conduct Authority also declined to comment on the potential regulatory impact of such funding models. The Quilter spokesperson says the firm doesn’t require advisers to tell clients about their loans, given the firm is ‘confident’ conflicts of interest are managed.
Future stability
This all leaves questions around whether firms will have to seek more external investment to balance the books. If a significant proportion of loans aren’t paid back, there may be more advisers wanting to retire than firms wanting to take the risk of buying them in.
“There does seem to be quite a lot happening in that space,” says another advice market veteran, who questions the longevity of some of the models.
Asked whether it was considering reviewing its offering in the light of recent interest rate rises, a Quilter spokesperson said: “In setting rates we seek to balance the headline market rate, our internal cost of capital and the affordability of our adviser firms.”
“We work closely with adviser firms to ensure repayment plans are affordable. As such we have a strong track record of debt recovery.”
The perils of debt can be seen more broadly in the consolidation space – the likes of Independent Wealth Planners are sitting on a debt pile of £100m – linked to the Sterling Overnight Index Average, Libor’s successor.
Whether all of this is sustainable will be one of the key questions that will define 2024.
Photo by Chanhee Lee on Unsplash
