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Paul Farrow: Another test of IFA resilience

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The decline and fall of IFAs has been wrongly forecast many times.

Will 2012 turn out to be a defining year for IFAs - a year which sees their numbers dwindle as the RDR countdown intensifies?

Let’s hope not. IFAs always get in the neck for being commission-hungry salesmen but I fear that the FSA has gone after the wrong people and the RDR could encourage people to turn to banks for advice.

There has long been an argument that advice given by banks and building societies is inferior to that offered by firms and individuals who advise across the entire market. Bumper fines handed down by the FSA last year, to Barclays and HSBC (for its long-term care division NHFA) do little to suggest otherwise.

The RDR is arguably the biggest challenge IFAs have faced and the nub of the matter boils down to the end of commission.

Ignore the rights and wrongs of commission and whether consumers suffer from product bias or are sold in appropriate plans because of “a cash incentive”. The issue is that consumers are going to have to pay a fee at a time when cost is major issue for households. Money-saving is the name of the game, not moneymaking at this time. It is all about discounts, cheap deals and cut-price bargains. Even the fund management industry is recognising that the level of fee they charge could make a difference, which is why a raft of new low-cost active funds has been launched.

In short, we have become a nation of penny-pinchers and we are reluctant to put our hands in our pockets.

Research last year, published by Aviva, suggested that most people talk to their friends, surf the web and pop to their local bank before opting to see an IFA.

These results come long before the rules change which will mean that people will know exactly how much they will pay for a product when they talk to an IFA.

The fear is that if advisers charge fees, more people will turn to banks. The RDR is supposed to mean that customers are treated fairly, yet any initiative that drives more consumers to the banks could be to their detriment.

But there is hope.

History shows that IFAs are a resolute bunch. After all, the death knell of the IFA has been sounded countless times before.

At the turn of the millennium, the impact of technology and the expected launch of low-cost products, such as the stakeholder pension, was expected to cut numbers by 40 per cent.

It didn’t happen. Stake-holder pensions were a spectacular failure while IFAs embraced technology rather than ignore it and clients have benefited as a result.

Depolarisation was also expected to see IFA numbers fall but again that didn’t materialise, while mounting professional indemnity insurance costs have also failed to deter advisers.

In 2006, Deloitte warned that “increased competition from areas such as bancassurance and multi-tie advisers” would put pressure on IFAs to quit. It did no such thing.

The other positive is that surveys also suggest that IFAs will meet the RDR challenge.

More research from Aviva shows that more than three-quarters of IFAs believe that they will still be in business a year from now while concerns about gaining further qualifications have fallen to 35 per cent.

Aifa, which represents 70 per cent of IFAs, tells me that member numbers “have not changed significantly since 2000”. It will be in the nation’s interest that it is able to repeat the statement a couple of years from now.

Paul Farrow is personal finance editor at the Telegraph Media Group

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Readers' comments (5)

  • In its report into the RBS debacle, the FSA has admitted having gone after the wrong people, so that point isn't a matter of speculation. What is perhaps more worrying is that the FSA has given no indication of the slightest intention of turning down the heat being directed at IFA's. Nor does it appear to have articulated any change of emphasis in terms of how it plans to redirect its firepower from this point on to bring the banks to heel, despite the latest Which? report that the banks are still flogging Bonds hand over fist and taking anything up to 8% initial commission. Actions speak louder than words.

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  • The FSA can and must abandon this initiative immediately, the regulators and the regulated could work together and produce a better outcome for consumers.

    Rules and regulations are no subsitite for effective coordinated monitoring and supervision as well as quality intelligence at ground level.

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  • But RDR applies to the banks too. If a client sees an IFA and doesn't want to pay a fee, he'll have exactly the same issue when he talks to the bank. In reality, for most products the "fee" will only be a more transparent form of what was previously called "commission" anyay.

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  • IFA @ 11.52

    I used to assume that too, but in effect, banks can build profit into their own in house engineered products, and remunerate their staff by salary and bonus, the latter part being directly linked to the 'profit' sold in the products. So the overall cost to the client will be hefty and effectively concealed as far as 'commission ' or 'fee' goes. But that's life and this is what will happen whether we like it or not.

    I personally believe that IFAs will survive and prosper provided that they deal with wealthy clients able and willing to pay fees for complex advice/planning. Anybody hoping to survive with a cottage industry, 'do anything that walks through the door' model will probably fail to make a living. In many areas these advisers are very valued and will certainly be missed.

    The bottom line is, if you wish to make a good living, follow the money and face reality however unfair or annoying it may be.

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  • Hi IFA,

    You are right RDR does apply to the banks but it doesn't take a business genius to work out how they might circumnavigate it.

    Firstly you set up your own life/investment company which manufactures financial products whose 'factory gate' cost is quite high.

    Next you have a branch based team who recommend these products and do the paperwork. This team is targeted but is salaried so no commission is earned on sales.

    This sales team looses money for your bank but this is made up for by the life/investment company which makes plenty.

    As far as I can see this would meet the requirements of RDR. The requirement is that no commission changes hands - there is no requirement to charge a fee.

    I think the banks can continue as normal with just a little re-structure.

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