Inter-Alliance's £15m cash injection from the City last week brings the total invested in the national IFA by institutions to just under £60m since the beginning of 2002.
With the other listed IFA giants Berkeley Berry Birch and Millfield also recently raising institutional funds despite heavy losses across the IFA industry, many observers are unsure whether to pour more money into a loss-making business model in the hope that leaner, meaner money-making businesses will come out of it.
Artemis fund manager Derek Stuart seems to be willing to take that risk. His rationale for putting £1.5m from his special situation fund into Inter-Alliance is that, with the cost base down from £30m to £26m a year, progress towards profitability is being made.
Stuart says: “Inter-Alliance has been an absolutely dreadful investment in the past and there has been a lot of negative sentiment around the company. Financial controls and forecasting have been weak in the past but there is a lot they can do internally to turn the company around and the board understand the problems that need to be faced.”
Last year, the 1,250-RI firm received inward investment of £32m, with a further £12.5m raised in March this year.
HBOS, Henderson and Artemis have now participated in a share issue that see the stakes of existing investors Scottish Widows, Norwich Union, Friends Provident, Skandia, Gartmore and Merrill Lynch diluted by 83 per cent.
In July, Berkeley Berry Birch raised £20m from institutional investors off the back of a £39m loss last year while Millfield raised another £8.85m to support its business despite figures showing losses growing to £11.5m in 2003 from £7.1m in 2002.
But are investors focusing on the big boys of the IFA sector simply because they are in the public eye?
Scottish Widows intermediary and partnership director Robert Wyllie says: “The reality is that all the listed IFAs have had a difficult time and their share price has suffered. But listed businesses are subject to the scrutiny of the stockmarket so it is not right to say these companies are any worse than other IFA firms, rather that they are more transparent.”
But Numis analyst Justin Bates thinks Inter-Alliance has too much to do to turn the business around before needing more cash.
Bates says: “I am still not convinced the Inter-Alliance business model is going to work. They will have to improve productivity which will mean getting rid of some of their unprofitable advisers.
“There is some hope for Inter-Alliance in recent statistics from the Association of Private Client Investment Managers and Stockbrokers that show private investor activity is picking up but the company is by no means saved yet.”
Inter-Alliance chairman and chief executive Keith Carby says the corner has been turned, not just with reductions in outgoings, tightening up of accounting procedures and investments in technology but also with the company's new focus on non-regulated business.
Since June, the firm has started a programme to bring its advisers' non-regulated business on to the firm's books. Previously, non-regulated business did not count towards company turnover, at a time when most other IFAs have responded to the lack of consumer interest in regulated investment products by switching their business focus to protection and mortgages.
The 145 advisers selling non-regulated business through Inter-Alliance have from the outset put an average of £3,000 a month through the firm's accounts without reducing their regulated business.
Carby says: “If that level of business is repeated across the board, we are instantly very profitable.”
Abacus director David Ferguson thinks Inter-Alliance, Berkeley Berry Birch and Millfield are still targeting the wrong end of the market but are too big to lose.
Ferguson says: “All three firms are doing business on the basis of quantity not quality. The reality is the providers get so much distribution from these companies, they do not want them to go bust. But it will take a dramatic turn-round for the people who invested before August to get their money back.”
Wyllie rejects the suggestion that the investments have been made to ensure a particular company's products are sold by advisers and says the FSA would no doubt have spotted this if it had been the case. He says: “Our investments have not been about controlling distribution. We already have lots of distribution with our direct sales, bancassurance and IFA relationships. This is not a form of extra commission being paid to listed national IFAs, more that we have tried to help the intermediary sector through a very difficult time.”
Carby is talking about reaching operational break-even point in the first months of 2004, just a few months later than his predictions of last year. If Inter-Alliance does move into profit by then and the nay-sayers are silenced, then those who have taken stakes this time around will find no shortage of life companies and bancassurers looking to take their shares – costing 2p – off them.
Stuart says: “I would love the guys at the life offices to say: 'I will take your shares for 5p.' But this is purely an investment play for us.”
While it may be a pure investment decision for Artemis and the other institutional investors to take a piece of the listed IFA sector, it must be nice to know there will be ready buyers in the form of life companies with deep pockets.