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Martin Bamford: Is the IFA model ever scalable?

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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

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Readers' comments (16)

  • There is another fundamental difference between IFA businesses and firms of Solicitors and Accountants: the latter two create larger firms on the back of giving advice to corporates. That enables them to create an infrastructure, to charge substantial fees and to bring in trainees at a junior level who can generate some fees and therefore pay for themselves.

    However you won't find big nationals that are effective and profitable in respect of advice given to smaller customers except where it is purely process-driven as with conveyancing and some types of litigation.

    Most partners in firms of solicitors and accountants are as individualistic as we are and make poor employees. Once anyone attempts to impose a corporate culture they are inclined to head for the exit and start up again, just as we would do.

    And there is an additional factor for IFAs, namely the supervision issue. Scalability implies increasing the layers of supervision, which involves much additional cost without any discernible benefit to clients.

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  • Another issue for large firms (and networks) is what I call the LCD (lowest common denominator) factor - i.e. that you have to have systems in place to govern a wide range of individuals, with different skill sets, experience and, frankly, ethics. These systems, if they aren't tight enough, will expose the firm to unacceptable levels of risk, yet if they ARE tight enough, will prove very restrictive to anyone trying to be even slightly creative on behalf of their clients. For example, our network won't allow me to advise on QROPS (highly suitable for many of my clients in Spain) because then they have to let others do so too and they don't want the PI risk. Result - I refer QROPS cases to a directly authorised firm which ironically uses my network's sister company for support services!

    I think that the post-RDR era may be difficult for some of the large firms as they seek to provide the tailored approach which the regulator expects whilst at the same time 'keeping it tight'. The other big problem many will face is the realisation (too late) that they have paid far too much for some of the firms/client banks they've taken over.

    Maybe small is beautiful after all!

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  • In a December 2009 column in MM (IFA gorillas are a bad joke) I came to the same conclusion as Martin. However my reasons are different. They are a) that multi-office IFAs require more managers so you end up with higher costs and b) people going for size in the IFA business are usually trying to make money rather than provide a good service. I agree we will end up with some big restricted advice businesses, and their out-of-a-box solutions could be ok for a lot of people. Noone has yet convinced me that you can do full-service personalised financial planning on a big scale.

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  • Its been my experience that when an IFA practice is 'scaled up' it is simply so that the major shareholders of that business can make a sale....and of course the people at the top are generally not the ones giving the advice and hold the relationship with the client. A 'boutique' style of IFA business offering a personalised yet specialised service is the way forward.

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  • Glen McKeown is right, both in his anlaysis and his conclusion.

    IFAs have, to date, been built aroundhigh powered individuals who have evolved from salesmen who then built their technical competence, and a support system, as they reduced their emphasis from hunting new client business and increasingly farmed their existing clients. However, most of these individuals expected to be paid as though they were still hunters, and continued to regard the clients as their property, not the businesses.

    RDR and the natural evolution of all business models, will lead to capital intensive business models where the client contracts with the company via retainer & management fees and becomes more aware that the advice process is based upon a number of contributors (paraplanners/admin/technical etc) pulled together under a corporate structure and ethos.

    Consequently the client will increasingly perceive him/herself to be a client of that organisation, not the individual adviser.

    This means that established firms with a client base will be able to rebalance their budgets, paying the lead "client relationship manager" a lower percentage of the income from each client (turnover for the portfolio of clients the adviser looks after, however it is earned), and spend the difference on support and technology.

    Conclusion: The small cottage industry, 1 to 10 man bands dependant on a few high powered individuals, will largely die-out over time (the stronger ones will survive as long as their leading personality remains active).

    Medium sized firms (say 10 to 50 staff) with an established client base (often acquired as smaller firms close) will thrive, as will some larger firms, although personally I believe that after, say, 50 and certainly 100 staff the economies of scale are lost as the need for increased supervision grows so as to maintain culture and standards.

    Businesses will be completely focused upon the service required to retain existing clients and their repeat fee income (topped up by one-off fees for additional work), with acquisition of new clients only required at replacement levels, say 5% to 15% a year, due to the exorbitant cost and disturbance to the business of focusing on attracting new clients.

    And who will be these clients? Well the 3 million Mass Affluent (£50K to £500K investible assets) as well as medium to high income households (£50K + pa joint gross household income and/or, £50K net assets inc their home) will be able to afford the minimum £500 (idealy £1000 to £3,000) a year for continuing personal advice, charged to products (as are the current 0.5% pa trail/renewal fees) at, say, 1% pa of invested value/ total/net assets/household income.

    Smaller clients can receive a basic initial and continuing service at "arms- length" with occasional "free" personal evaluations over the phone/internet cost effectively as a means of retaining the income they provide, but more valuably as a pool from which some clients will grow into mainstream clients in the future.

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  • Of course it is scalable. The problem is that the people who have tried to scale it have, by and large, made a hash of it.

    The bottom line is that to scale up you have to have a set of business processes that add up to a service that can be delivered consistently over time, with a client base that believes that the service is worth it.


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