The group says that those advisers who retain a significant proportion of their business in legacy assets face a real danger to ongoing revenue, which needs to be addressed well in advance of April next year when the sunset clause expires. Estimates vary, but a recent survey by Fidelity suggested 34% of advisers still draw more than 50% of their revenue from commission.
Nucleus said that the effect on profit may be proportionally more significant than the decline in revenues. The paper said: “We have seen advisers who have dismissed the threat to revenue because ‘only a small part of my income is exposed’.
On further calculation, this turns out to be perhaps 15% of income, but – and this is important – this can amount to 50% or more of actual profits.”
The group said that the asset management industry also faces some challenges and it is likely to be ‘an uncomfortable period of transition’.
It added: “Where prices are now so transparent across the value chain, the cost of investment becomes noticeably the largest part of this equation and the one where there is the most notable pressure…This brings the visibility of performance into sharp focus, particularly where tracker funds can be purchased for a handful of basis points, active management fees are likely to quickly come under a sustained spotlight.”
The paper concludes that fund managers will be ‘constrained in their ability to effectively distribute their product’.
Nevertheless, Nucleus also believes that the transition may be positive for advisers, providing an opportunity to re-evaluate and revive legacy relationships. Client outcomes may be improved by moving clients away from legacy providers.