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David Harrison: Stop supporting unprofitable IFA firms

They say one of the signs that doctors look for when trying to diagnose insanity is someone repeating the same mistakes over and over again.

One way of looking at this would be a company that has financial problems being taken over by a company that has financial problems. And when that new company fails, allowing it to be taken over by a company that has financial problems. All sanctioned and all legal. Surely this couldn’t happen again though, after the failings of banks and the spotlight being put on “large” organisations?

Eight years ago, this process of transferring bad to bad would have been revolutionary, now it is horrifying. Despite several of these purchases going wrong, there is collective insanity in the market, a belief that somehow, despite all the evidence to the contrary, these deals could be a good for advisers and clients.

Surely the test of whether you would be a good owner of these new clients would be: What is your track record of success so far? How much money have you made? Can you run a small business without losing money?

Here is an even simpler test, what makes the most logical match – allowing a company that is losing money to take over a company that is also losing money or using a company that has made a profit (and therefore the directors may know what they are doing) to help those advisers.

You may be one of those advisers that, through no fault of your own, find yourself being bartered over, and not for the first time. You may even be witnessing the authorities colluding with that bartering by steering you towards a firm of “choice”, a choice based on convenience, not on any com-mercial or market logic and, worse, based on a mechanism which has been used in the past to repeat the same failure.

The new firm inevitably fails (Why? Well they couldn’t make a profit when they were smaller, so the same directors cannot make a profit when the challenge is greater), and then another firm, also losing money steps in with golden hellos, big promises and a convenient way to switch clients, takes over, and fails.

The above are merely symptoms of the deeper underlying issue which is that the medium to large IFA firms struggle to make any form of profit. In the short term it means that such takeovers lead a product provider to keep a firm running longer than it should have through a further injection of funds.

Why would providers do this? To turn them into a single or multi-tie later on when no one is looking (and then watch the competent advisers leave).

The true answer should be – stop the artificial life-support of these companies, close them down and let the adviser deal direct with the client and the FSA. Call a halt to further insanity. Make the directors and shareholders responsible for the debt they have created.

David Harrison is managing partner at True Potential

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. From virtuous to vicious…
    ….these circles are everywhere.

  2. stop supporting unprofitable IFA firms
    Congratulations to David Harrison for saying, what everyone else is thinking. The FSA are wrong for allowing it to happen and the providers are wrong for aiding and abetting.

  3. Unprofitable firms
    Absolutely right, David. I once worked through Westons in Sutton Coldfield. The people running that firm got into financial difficulties. In stepped Barclay Berry Birch, they took on Weston’s business model and of course went bump. Bates then took over the business, they’ve again gone bump and the clients and advisers of the business have now all been moved to a new business run by the people that were running Bates.
    There is this strange mentality with the people running these firms that the most important thing is to be big rather than profitable. Is it an ego thing or is it that it enables directors to draw significant remuneration (that they couldn’t get out of a small business) until the company goes bump.
    Why doesn’t the FSA look at these situations?

  4. David Harrison: Stop supporting unprofitable IFA firms
    The other great example of recent times was Money Portal which was losing money on all fronts but managed to persuade its bank/s to lend it £14m to buy the then profitable Burns Anderson. The BA managerial talent then left with nice fat new balances in their bank accounts and shortly afterwards the whole show went down the shute. The bank/s should never have lent Money Portal the money for such an acquisition. Money Portal would then have failed by itself without taking BA down with it and leaving its bank £14m out of pocket. Who approved the loan, for heaven’s sake? There will be casualties across all sizes of IFA firms and the only way to stop the rot is for firms either to raise their charges substantially or for the cost of regulation to fall dramatically. We know that any prospect of the latter is remote (though we live in hope), so IFA charges are going to have to rise and people will have to choose between independent advice that they can no longer afford or accept that the only alternatives are DIY or the banks. Those of us with low overheads and modest aspirations may just about survive, provided of course that the RDR doesn’t finish us off.

  5. DAVID HARRISON STP SUPPORTING UNPROFITBAL FIRMS
    Yup…sound view…well done!

  6. supporting unprofitable IFA firms
    This is crazy. You cannot legislate to stop directors of companies – IFAs or otherwise – making bad decisions. It will be the shareholders to whom they are answerable. David Harrison did not name names but it is always possible that the directors of the acquiring company genuinely believed that they were acquiring something that could be turned into a profit centre, whether or not their skills, or market conditions, allowed.

  7. But who picks up the tab for teh big boys failures?
    The FSCS which is funded by those small firms who’ve remained in business. This has GOT to stop as Julian was implying. Otherwise all small IFAs will simply become “life coaches” and “FS Jargon explainers” and the client will get what they need, it will not be advice, the F-pack will not get a penny from any of us and they’ll all be redundant (I wish)

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