Small scale

22 October 2009 8:00 am

I recently read an article about the many things that make it great to be alive in 2009 - longevity, technology, global cooperation, medical advances… as well as Twitter, Spotify and Family Guy.

It is true that even a cursory glance back a few years reveals the sheer scale of lifestyle change in the UK. The dynamic of the IFA world is changing too, of course. I would argue that change is happening much more gradually than many commentators state but that rate of change is now accelerating largely through necessity rather than evolution.

I recently moved from a quasi-national IFA, top-heavy and bloated, often with all the confused strategy and vision of a Government too long in power, to a smaller group closer to the cottage industries of yesteryear. I did this to help establish a financial planning presence in preparation for RDR.

To me, the concept of big businesses run by managers who had no client contact has always created a conundrum. The business written has to support not only the business writer and their support staff but also a tier of managers who are often ridiculously expensive for what they do. Inevitably, the model breaks down.

I have had a couple of interesting meetings with Malcolm Coury, head of Money Wise, who has it clearer than most. Malcolm believes that in an ideal world, most IFA businesses can be split three ways - one-third for the business writer, one-third for overheads and the remaining third as profit. To his credit, Malcolm realises that the growth in both adviser expectation and the need for higher quality support has shifted this to a huge degree - eroding profits that become far more dependent on controlling overheads and support staff expense in the shorter term and sustaining the growth of renewals and fund-based income over the longer term - essentially shrinking active costs while growing passive income.

“To me, the concept of big businesses run by managers who had no client contact has always created a conundrum - inevitably, the model breaks down.”

If Malcolm’s model is right, then for me the future for new model financial planner businesses is definitely smaller firms, where there are maybe a handful of well-qualified, ethical, hard-working advisers with commercial as well as educational strengths. Under these, a group of two or three quality support staff or para-planners and maybe one or two pure administrators.

That can be achieved relatively easily in isolation but the problem is that it is not particularly scaleable nationally. As soon as you introduce more business writers, the compliance and supervisory function complicates things and the risk premium increases, demanding more management - and we are back to bloated nationals again.

Fees and commission generated can only stretch so far and no amount of rejigging can avoid that. Large businesses seem to be missing this point. There is a sense of them ignoring the obvious to squeeze a short-term exit for profit.

Steve Buttercase is a financial planner at Sense Financial Solutions

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