After the developments of the last few months, it would be easy to get depressed over the future as an IFA. Traditional sources of income are disappearing rapidly. Commission on personal pensions is now around one-third of what it once was and other pension products may well follow.
Commission on endowments is heading towards two-thirds of recent levels – even assuming you can persuade clients they are a reasonable investment, which they still are for some.
The nature of the business itself is under threat from the review of polarisation and the apparent Government certification offered by Cat standards. One product looks pretty much like another and the ways to market are broader than at any time in the past.
All is not black, however, and there is a huge potential market awaiting those with the skills to exploit it. A Merrill Lynch survey quoted widely in the press last year showed the number of individuals with assets of more than £50,000 is increasing exponentially. Recent figures indicate that the mass affluent market – those with assets of between £50,000 and £500,000 – represents 4.2 million individuals with total assets of between £450bn and £2trn.
A manager at Countrywide once explained to me that the time you really worry about money is when you have got it (prior to that you worry about eating).
This group contains a high proportion of people who need the services of a good IFA. Looked at another way, 0.5 per cent of the assets of the mass affluent market represent potential trail commission totalling £2.2bn a year or £100,000 for every individual IFA.
Obviously, this is an oversimplification and much of the money is not likely to referred to IFAs but the figures do show the potential is there.
The competition is also intense as organisations launch wealth management services and private-client banks reduce the thresholds for their services.
Wealth management is one of those nebulous terms that can mean whatever you want. Even selling personal pensions and endowments can be taken as wealth management, the purpose being to accumulate wealth in the first place. Indeed, a portfolio of clients with these products is as good a place as any to prospect for wealth management opportunities (from little acorns, etc).
Many advisers have found that maturing endowments have provided great opportunities for ongoing financial advice and many long-standing pension policies due to mature soon are likely to be candidates for drawdown – a specialised form of wealth management – as well as the investment of tax-free cash.
The interesting feature of both these opportunities is that they give rise to a secure and potentially growing income for the adviser over time.
People are accumulating sizeable assets in a variety of ways peculiar to today's environment – inheritances of smaller amounts but in larger numbers, people starting to invest earlier, increasing maturities of private pensions (maturing pension funds are estimated at £10bn a year) – even a lower proportion of incomes spent on food. For some, endowments did more than just pay off their mortgage. But good news does not sell papers.
Some will argue that many of these fortunate people are doing it for themselves. Increasingly, the papers are full of articles on investment, the internet offers millions of pages of information on investments and even small bookshops usually contain at least a few books from various investment gurus.
The trouble is information is not analysis or advice. In some ways, the proliferation of information acts in the IFA's interest. There is just too much of it and it feeds confusion. Having access to someone who can cut through the mass of figures and make a recommendation on the design of a suitable portfolio is considered valuable – and worth paying for – by many.
The bulk of investors seeking quality or comfort will tend to seek out an IFA, a fact supported by the increasing proportion of retail investment business that goes through the independent sector.
Even relatively sophisticated clients require some hand-holding from time to time. As a general rule, investment is not their primary occupation and most of them have better things to do with their free time.
Another opportunity will be provided by the changes in Pep regulations.
The maximum possible contribution to Peps over their lifetime was £87,600. Despite recent poor performance of world stockmarkets, there are many individuals with substantial Pep portfolios who will require advice on rebalancing the portfolio and reviewing the funds they hold. Once an initial review is completed, these people will require ongoing advice on the running of their portfolio and any additions by means of Isa contributions.
This is not simply a matter of selling new Isa products but of maintaining an overall view of the portfolio in the light of their requirements. As such, the availability of trail commission or payment of fees is fully justified and will form a substantial proportion of the continuing income of many IFAs in the years to come.
Going beyond this, clients do not necessarily just hold assets in tax wrappers. They most probably hold an odd assortment of investment and savings products accumulated over the years in no particular order. The greater the variety of these products, the more likely it is they will benefit from advice – and be willing to pay for it – on an ongoing basis.
The ability gradually to restructure portfolios into a coherent whole, taking into account the tax implications of any changes and the specific future needs of the individual, will be a valuable asset that enhances the business of any adviser.The ability to advise on a wide range of funds and products puts IFAs in an ideal position compared with tied (or multi-tied) or direct-sales operations and it is an advantage that even the removal of polarisation will not overcome.
The opportunities for holistic financial planning utilising, but not limited to, tax-efficient wrappers to provide lifetime financial solutions for clients are huge. For many clients, there is no reason why assets held outside pension funds should be managed any differently from assets held within income drawdown funds, since they both have the same aim, and there may be merit in managing the two as a whole to maximise tax-efficiency.
The fact is IFAs have a lot to offer clients through advice on asset allocation, fund selection within a portfolio and tax planning to provide a long-term financial package meeting individual needs and maximising peace of mind. In return, advisers stand to earn a very respectable and secure future income.