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A consumer&#39s view

One of the big weaknesses of the IFA industry is that it produces little research on its clients and business trends. Instead, it relies on sales-orientated surveys from those who have a vested interest in talking the market up, in particular, product providers.

One obvious example is IFAs&#39 ostrich-like attitude to their business and the effect that the general economic climate will have on it. While the rest of the UK worries about levels of consumer debt and the impact of unemployment, IFAs continue to talk about shares bottoming out and the start of another bull market.

We would all do well to look at the predictions of those who take a more realistic view of the future. You cannot afford to ignore reality if you want to survive. A quick glance at the CML&#39s housing market forecasts is very revealing.

The CML&#39s predictions of a rise in the number of unemployed claiming benefit from 963,000 to 994,000 next year is not exactly cheery reading. The CML is likely to be more realistic than Government forecasters because its members stand to lose out if their customers cannot meet their mortgage commitments.

The knock-on effect of this is that the CML is also predicting an increase in arrears and possessions, which is not exactly good news, either. Arrears are expected to rise from 65,000 a year to 67,000 in 2004 while repossessions are estimated to rise from 9,600 to 10,300 in 2004.

Bank of England statistics show that personal debt has hit an alarming all-time high of £878bn, including homeloans. That works out as an horrific £14,633 for every man, woman and child in the country.

Total lending to individuals grew by £10bn in June alone – £1bn higher than the rise in May. What will happen to those who have borrowed when they find themselves made redundant? Against this background, IFAs should be battening down the hatches and preparing for a lean period. A quick recovery in the stockmarket is unlikely to be just around the corner for a number of reasons.

The CBI recently pointed out that any hope of a recovery in UK company profits is some years down the road because the requirement to reduce pension fund deficits will soak up vast amounts of cash for some time to come.

It issued a strong warning that the £160bn pension black hole will damage corporate investment and cut Government tax revenues.

The CBI estimates that extra company pension payments will total £8bn in 2003, £12bn in 2004 and £16bn in 2005. This would mean total annual contributions would have doubled in just four years to £43bn.

Some experts have put the pension deficit at £300bn so this could be a very conservative estimate. This, in turn, will keep company profits and share prices depressed, which will increase the need for even higher pension contributions.

If we are hoping for the US to lead the world out of recession, there might be a bit of a wait here, too. Despite three years of falling share prices, US shares are still on a price/earnings rating which is double their historic average.

These multiples could only be justified if company profitability were to stage a sharp recovery. But with increasing competition from low-price goods manufactured in China and Third World countries, this is not likely to happen across the board. There has to be a correction here, too. Furthermore, with the US current account deficit at an estimated 5 per cent of GDP, there has to be some sharp tightening of fiscal policy or the dollar will go down the pan, all of which is deflationary.

Against this scenario, what should IFAs be doing? If there is a continuing decline in new business, IFAs will have to look at charging fees for annual financial reviews.

Private client stockbrokers have already introduced inactivity charges on accounts. A move towards fee-based business is desirable, anyway, if IFAs truly want to be regarded as professionals.

A thorough spring-clean of overheads and costs is essential, too, if IFAs are to remain in business. For some, the answer may be to become a tied agent although that will not be a soft ride either.

Those nearing retirement will probably sell their business, if they can find a buyer, and retire. Either way, there is likely to be a massive rationalisation in the industry.

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