The industry press has been buzzing about “summit talks” amid concerns over the viability of IFA businesses. No wonder. IFA firms are under pressure because, for most of them, their business models do not add much value to the individual adviser and thus do not participate in enough of the profit stream.
The economics of most IFA firms that focus on regulated life, pension and investment business are precarious. The firm keeps a modest margin of commissions received to pay for overheads and compliance and more because it has to pay out a high proportion of income to the producers.
The sizeable majority of firms that rely on up-front commission have to balance volatile commission income against overheads that do not decrease and have become increasingly onerous over time.
Little equity value is built in IFA firms as all the income stream can walk out the door. This is all because too little value is added to the adviser’s role.
Despite this IFAs, at least the individual RIs have proved remarkably resilient over many years by changing with the times. So what adaptations are needed now that can create a sustainable profit stream at firm level? We provide three possibilities below.
Create serious multi-tied businesses
Genuine multi-ties offer medium-term opportunities to streamline and integrate business processes with providers and to simplify product selection without compromising the customer proposition. For distribution businesses that focus on mass market sales, this can make longer-term sense because smaller case size business in heavily competed markets produce low margins in absolute terms and reducing costs can make big difference.
Although multi-tied deals are being done, they could not be described as creating a different, more profitable and durable operating model. Current activity might be characterised as firms hedging their bets but this is not the same as creating a different business.
Take advantage of immediate post A-Day opportunities
The sizzle about residential property clouded the real opportunities for advisers and customers. The big opportunity is for the many thousands of fifty-somethings or late-forty-somethings who have way less than the maximum lifetime allowance in their pension pots.
They have substantial non-pension investments that they can commit to what is in effect a long-term pension drawing account. We call this the “headroom market”. Big lump-sum contributions (now facilitated by the new rules) will increase substantially and are hugely tax-efficient.
A 47-year-old higher-rate taxpayer can add nearly four percent per annum to after tax investment return by age 55. This market will not be properly served until advisers gear themselves up to focus on the clients with “headroom” and can confidently articulate the benefits and offer advice on asset allocation and related tax issues.
The prize is the added revenue and commission from big case size business, which, if serviced properly, could yield further investments in the future. There is a big role for product manufacturers and service providers to help. This can the precursor to the opportunity the industry now has to.
Create an upgraded mass affluent advisory model
Beyond the immediate attractions of the “headroom” opportunity, this trail-based, financial planning relationship model redefines how value is delivered to clients and – critically – how an advisory firm delivers support and value to individual advisers. Among other things, this will include enhancements to servicing, specialist advisory support, client targeting and maybe branding.
Based on experience elsewhere, advisory firms would keep a substantially bigger proportion of the gross commission, advisers would earn more owing to greater sales volumes and case sizes and – the holy grail – real equity is built in the business. We think there is far more business potential than there are the right advisers with the right proposition.
Making profound changes in a business is challenging. Many will realise that business models have to change but are inhibited from starting. Moving to a relationship driven, investment-focused, trail-based – or even fee based model – is not a new idea. Creating closer multi-tied operating models have been discussed for some time. We would assert that this is an ideal time for distribution businesses to initiate change in their operating model owing to convergence of five circumstances:
a: “Burning platform”. For the mass market businesses that cannot go upscale and are pressured financially, initiatives on costs and effective processes are sorely needed – extra commission by itself is not a way out but better constructed operating relationships might be.
b: A-Day. Pension simplification presents an opportunity (and a genuine reason) to reach out to the mass affluent that we have not had in a generation. We think volumes of business are constrained only by the number of suitably confident and equipped advisers
c: Large case sizes. Our market model of opportunities by customer segment indicates the potential for a dramatic increase in case sizes if we get in front of the right mass-affluent customers. The six-figure case sizes that we have seen in the drawdown market are also available in other segments prior to retirement. Large case sizes help with the transition to a trail-based model
d: Advice support tools: We are witnessing the development of advanced PC-based tools that help with asset allocation – and some are already able to handle multiple client goals (not just retirement). These will help an adviser raise his or her personal game and help the distribution business better “control” the scope and nature of advice provided.
e: Emergence of wrap platforms. Many advisers do not yet trust the emerging platforms and take-up remains slow. Yet, as the developers improve their platforms and new offers come to market, the potential to improve client service will be realised. The ability to manage actively clients’ investments and relationships neatly dovetails with the mass-affluent relationship approach.
We can see winners coming from a number of directions:
- A few large IFA mass-market firms that genuinely grasp multi-ties.
- Retail banks which can access their mass-affluent clients and build a dedicated salesforce for the purpose
- Private banks and other “wealth managers” which expand their proposition and client base.
- Smaller professional IFA firms which can mix pension and investment expertise with a clear focus on the right customer segments.
- Product manufacturers which grasp these developments and work out how to support distributor firms and their development
- New distributor firms from the US or elsewhere which already operate a broader financial planning propositionsCourage and vision are required to make the right moves. Praying for relief from the current pressured model is not the answer.