I do not question for a minute the predictions of the EY team Money Marketing recently reported on about the future of independent versus restricted advice. EY’s Malcolm Kerr knows more about this market and its economics than anyone. But I want to agree to disagree and focus on where IFAs will not only be strong and successful but hip. I do not mean hip as in body replacement parts but hip as in values because independence reflects the values of IFAs’ target customers.
First, however, EY’s estimate that half the advice market will be restricted by 2021 is about right, though I do reckon its estimates for takeover of small firms – 200 to 400 per year – may be exceeded. Also, the life companies’ rush into distribution, soon to be followed by the banks, could push up the restricted market share.
Does this matter? In a technical sense, no, because the independent/restricted division is somewhat artificial, especially as regards the “whole of market” research issue. But there are two key issues wealthier and smarter investors will increasingly regard as critical.
First is independence in its primary meaning. Most people want their children to become financially independent. They know exactly what this means. Likewise, the kind of clients IFAs want – business owners, start-up entrepreneurs, high earners – know what independence means when they look at other businesses. Do the owners of these businesses have control? Can they make decisions without referring to a hierarchy of bosses? Do clients get the services of senior people, and the same senior people?
On all these counts, IFAs score highly. They are capable of adapting their service propositions to the needs of the client in a way large firms usually cannot or will not. They can be responsive and make quick decisions. As businesses, they can form relationships with other professional firms where they work together as equals. A national accountancy firm might prefer to deal with a national restricted adviser but will a regional law firm take that view? I think not.
Second is investment. Professional firms, whether independent or restricted, will have centralised investment propositions that ensure consistent outcomes in terms of suitability. But large firms will do this by becoming investment managers and taking a bigger share of profit (though not necessarily of income) from asset management than advice. Independent firms will instead have a range of propositions for different client segments, employing combinations of in house, outsourced and insourced investment solutions.
So long as buyers of advice busin-esses believe profits derived from asset management are worth more than ongoing advice fees, the trend of integrated advice and asset manage-ment will continue. Since the trend is based on this belief (as reflected in business valuations) rather than on any proven operational efficiencies or gains to clients, it is likely to end before many IFA business owners retire. I hope and believe they are taking a longer-term view.
So while the number of IFA firms may shrink quite fast, the sweet spot will be IFAs with regional strength and relationships with regional law and accountancy firms. Such firms, I believe, will account for a rising share of high-net-worth advice over the next decade.
Chris Gilchrist is director of Fiveways Financial Planning