Martin Bamford: Is the IFA model ever scalable?
Lunchtime recently saw us trying to work out why no IFA firm has ever successfully scaled its business in the UK.
We could only think of three that have a truly national brand and quickly discounted all three for similar reasons - one is predominantly an execution-only business with a small advice arm, another is anything but independent and the third offers services with a perceived lack of independence. It seems IFA firms can get big, in some cases quickly, but not without sacrificing profit or quality of advice and service.
Looking through the list of the biggest 100 IFA firms by turnover, many fail the independence test or fail the profitability test, or both. Others would be better defined as stockbrokers, general insurance brokers or employee benefit consultants.
Networks and nationals, in the main, consist of disparate groups of individual advisers, each working under a common business structure but with largely separate working methods and approaches to advice.
Some of these businesses grow quickly by throwing money at recruitment, only to reach a certain size and see their advisers move to a competitor with similarly attractive joining incentives and lower retention charges. This is no way to create a sustainable, profitable business.
Consolidators are an untested model. They may or may not succeed in creating a successful national IFA brand in the long term. At this early stage in their lifecycle, it could go either way.
What is holding back IFA businesses or is financial advice ever scalable? Posing this question on Twitter seemed to suggest elements of what we all do are scalable but advice is not. It might be possible to scale the marketing of a brand, the approach towards investment advice and even the production of advice reports. These are all things where systems and processes can be applied.
Scaling advice itself, which is typically delivered on a face-to-face basis and relies on individual adviser relationships, is much harder.
Is independent financial advice destined to remain a cottage industry and is that a bad outcome? It might be better for the IFA business model to accept limitations in terms of scale than to reach for the stars and consistently fail. We might all benefit from a relatively small number of modestly sized firms doing things well, rather than a few Goliaths racking up substantial losses and attracting negative attention from the regulator.
Martin Bamford is managing director of Informed Choice