I wrote last month on my first experiences of the independent versus restricted argument when I worked at Hill Samuel from age 16 back in 1980. I want to continue my look at where independence has come from and where it is going here.
In 1985 I was recruited by a local IFA firm. It was a sizeable regional firm by the standards of the day, managing some £15m, rising to £25m just before the 1987 crash. The firm had originally been built on bond switching, with its income earned from a combination of commissions and fees. It took 5 per cent initial commission up-front with fees of around 1 per cent per annum.
From switching individual policies, it had moved to set up its own broker funds with life companies providing the fund wrappers into which the firm invested clients using bonds. Originally, we were only able to access the insurers’ own funds but, as the model developed, we were able to buy in unit trusts in a primitive version of how platforms operate today.
Pretty much everyone who invested through the firm went into its own funds with co-operating insurers. Did this make us less than independent? To be honest, it was a question over which nobody agonised: not the clients, not us and not Fimbra when it became our regulator in 1988.
We chose the life companies we used for the fund shells and we chose the funds we bought into the shells. Nobody could compel us to sell their funds and the income we earned was pretty standard for the times.
The driver behind the set up was not so much that the firm earned more income but that it contained costs by managing clients’ money efficiently. That was my first experience of broker funds that are, in effect, run by the likes of Towry and St James’s Place today – albeit in a slicker and more advanced incarnation.
After the 1987 crash I took a break from financial services, returning in 1991 to work for the much maligned Knight Williams. Knight Williams billed itself as independent. Its target market was the wealthy retired. As with my previous employer, pretty much every penny invested went into its broker funds, originally via life assurance investment bonds.
Soon afterward it set up its own unit trusts and everything was moved over. If the performance had been there, I guess nobody would ever have looked twice at how Knight Williams operated. But it was not. In part, this was down to the markets but much of the problem was down to charges: Knight Williams took 5 per cent initial and 2.5 per cent pa on its own funds.
It needed charges of that magnitude because it ran an extremely expensive operation, with advertising in the Sunday Telegraph, a New Bond Street head office and similarly prestigious properties for its regional offices. It also paid salaries way above market rates. The combination of poor performance and high charges led to disgruntled clients forming an action group, which resulted in a 1995 documentary implicitly damning it for funnelling every client into its own funds. That year saw the end of Knight Williams, though not, as we shall see, the end of its model.
Neil Liversidge is managing director of West Riding Personal Financial Solutions