Is Small Beautiful ?

The forecast demise of the small IFA has been in the news again recently.  A one-man IFA, prominent in the blogs and letters pages, recently wrote, “Many people in my position have been in the business for many years ……………” The rest doesn’t matter. I feel compelled to rant once more on the issue of size!

To suggest that your model works because it always has done is imprudent in a world of change. There has never been more change in our industry; the great change drivers are hyperactive – demographics, IT, legislation and regulation.

Part of that change will most certainly result in a significant reduction in the number of small IFA businesses, largely lifestyle businesses (please note that I have said ‘significant reduction’, not extinction, as there are notable exceptions). Why?

  1. The core cost of running the business is much higher before any advice is given

  2. The need for wider and specialist knowledge is increasing

  3. Succession within the business is essential to the client

  4. Networks and nationals will largely become restricted or vertically integrated businesses

Let us consider these issues in more detail:

The RDR increases the core cost of running an IFA business – the cost of regulation, of research and of management. This cost is a dead weight around the business – which will now need more remuneration in order for this cost to be amortised satisfactorily. This means more business, almost certainly more advisers. Outsourcing can ease the burden, but the FCA is increasingly concerned about the due diligence applied when appointing outsourcing partners. In other words, expertise is needed in order to outsource satisfactorily.

There is an increased need for specialist knowledge, both in terms of current product and legislation, and also in terms of the ever-increasing amount of legacy. A very typical client might have advice needs around investment, pensions, trusts, long term care and inheritance tax. They may well hold old products, which demand knowledge of past legislation and rules. It is almost inconceivable that one person can retain satisfactory knowledge on all these and other areas. Moreover, the RDR does not allow an IFA to refer to external specialists whilst reducing its own area of expertise (as a lawyer, accountant or doctor can).

An adviser will retire, ultimately die and might be seriously ill before either. He or she might also leave the business to do something different or be banned by the regulator. In all such events, they are of little or no use to their clients. Advisers tend to be similar in age to their clients. When a client reaches retirement age, the adviser will probably be close to so doing. When the client is in his 70s and 80s and might need specialist advice on care issues, his original adviser might be in the same boat. Succession is a must. The client should be the client of the firm, not of the individual adviser. A top firm will go on and on, giving both clients and staff security. If the firm continues through generations, there should be no concern about liabilities in respect of earlier poor advice. This is the attitude of the gun-for-hire adviser whose only interest is maximising income and, sadly, ‘client be damned’. Bad advice tends to show up at the maturity of a plan, which might be decades after inception. It is absurd that there should be a long-stop on such liabilities as proposed by the ludicrously named IFA Defense Union (which sounds more like a pseudo-military outfit than an anti-consumerist trade body)!

The RDR means that most networks and nationals will become restricted in status. The demands of suitability, of due diligence, and of extraordinarily wide product knowledge and research are such that business owners will not be willing or able to risk their ‘license’ by operating with self-employed advisers, who, historically, have been very independent of thought and action. Ironically, the majority of these have not been independent with regard to advice. They have been biased to a small number of insurers. Anyone doubting this should look at the sales of funds (including ISAs) versus the sale of insurance company bonds over the years since regulation started or look at data available from providers such as Touchstone. It is odd that the approach of RDR has seen the sales of such bonds plummet to a small fraction of previous levels. Many advisers should be very grateful that there has been no investigation of such mis-selling.

The best test is recommendation. If I were asked to recommend an adviser, I would establish a set of criteria. A suitable IFA firm must be made up of a group of competent advisers and planners who, together, are able to meet all the reasonable demands and needs of a client and who are likely to be around for decades.  Why on earth would any reasonable person demand anything less? The future for those small IFAs that are exceptional will be to merge or grow. There is no successful or profitable future in being small.

Those who doubt any of this might well apply the Upton Sinclair test. Is their income dependent on their NOT agreeing? Always a good measure!