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IFA gorillas are a bad joke

The effort to create large national firms of IFAs represents not so much the triumph of hope over experience as the ability of greed to turn reasonable people into pantomime gorillas.

I spent two years as part of the founder management team at one of the first IFA networks, Burns-Anderson, and can present the case against IFA gorillas (networks or big national firms) in its simplest terms.

Within a few months of the network’s start-up, my ten-strong research department was doing sterling work analysing and comparing products and distributing the research to members.  This research (along with the usual promises of better administration and higher commissions) was one of the reasons new members signed up. But one of the bosses took me aside one day to complain about the way we were doing things. “My idea,” he said, “is that we collect 15 per cent of revenues off the members and give them almost nothing back, so that we’re hugely profitable and can float on a P/E of 15. Then we’ll all make fortunes. All this service stuff is nonsense.” 

But the members, despite having shares in the network, couldn’t see it like that and boringly insisted on having their commissions paid on time. They won: more and more was spent on administration and Burns-Anderson staggered on unprofitably, surviving only with the help of periodic transfusions of new capital from product providers. Its sale in June out of the wreckage of The Money Portal for £100,000 after being bought for £14 million the previous year represents only a small fraction of the overall losses incurred by those who invested in this vampire business.

The conflict between profitability and service explains why large national IFAs don’t work. The only way such firms can be really profitable is by cutting what they spend on service. People continue to pretend otherwise, but any IFA can buy off the peg a back-office system that delivers 90% of what a big national firm uses as its engine. Where does the gorilla deliver more bananas? Not research, since under £10,000 a year buys you both fund and product research. Not marketing, since national IFAs don’t do any. Compliance? For under £10,000 you get a decent consultancy service. Portfolio construction? Not that old “Trust your clients’ lives to the outputs from this clever black box” pitch again, please! Unless I’m missing something, your box got crunched.

There is only one way networks and big IFAs have been able to ‘generate value’ – by getting higher rates of commission.

I contend that if big gorilla IFAs can’t answer the following question, they don’t have a viable business model: How can you make a fully-trained, qualified and competent IFA 30 per cent more productive than if he was working in a small firm?

When you could negotiate commissions upwards (as Burns-Anderson did) you could conceal your failure to pay your way. But when you can’t hide? In the post-RDR world, can a national IFA get away with fees 25 per cent higher than its smaller rivals? If you can, there’s the added value. But for whom?

Today’s most successful adviser operation is not an IFA. It’s St James’s Place.  The product profits are the gravy that runs this train. It’s not a model that can work for IFAs. But it tells you what anyone with a large IFA business should do if they want to make real money. Go the “restricted advice” route if you sincerely want to be rich – after all, it’s what a lot of bank wealth managers will do. Smart providers will soon be getting their chequebooks out.

Big national IFA firms are fool’s gold. They’ve never worked and never will (I don’t count the hugely successful HL as an IFA firm). And small IFA firms will never be worth more than a row of beans. Despite that, they can and should be  goldmines for their owners –  a paradox I’ll explain in my next column.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report
The individual who posts the best response to this article (as judged by the editor) in the next week will win a 6-monthly subscription worth £65 to the newsletter Chris edits,The IRS Report.


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There are 19 comments at the moment, we would love to hear your opinion too.

  1. Of course the smaller firms have always been able to take on the bigger ones, and win.

    We have always known that being a manufacturer and seller is the place to be.

    For some of the smaller firms getting the technology right and the marketing and the R D R will fall away into history.

    Richard Smith IFA and Tech Consultant.

  2. Smaller IFA’s react more, and quicker than large organisations and to local conditions, we will always be here despite all the nonsense spouted by over qualified holier than thou types who try and take the higher ground in terms of “doing a better job”

    Small IFA’s offer as a matter of course what the conglomerates try and suggest they offer…..service to their clients, thats why they keep coming back to us.

    Keep it small 🙂

  3. Neil F Liversidge 7th December 2009 at 2:09 pm

    I could not agree more. I started as an investment researcher / technical adviser at DBS in 1995 when Ken Davy was the boss. Under Ken Davy the research was objective and the panels ‘honest’ i.e. based on the merits of the product and fund. After ther Misys takeover it was another matter. What had hitherto been a very fair and pleasant culture to work within soon became bullying, venal and unpleasant. The price tag for investment houses to have funds panelled was set at £100,000 by the new head of research in her eagerness to toady to the new regime. I refused to go along with it and was sidelined in favour of a more pliable replacement. Every effort was thereafter made to bully me out of my job. Having experienced it first hand, and having seen how they can strangle their members, I would never join an old model network, though to be fair Financial is very different from the rest and should not be tarred with the same brush. These days I am a directly authorised IFA using SimplyBiz for compliance and on the whole very happy with their services. They give me what I need without constraining the advice I give to my clients.

  4. I think Chris raises some valid points, although I would contend that there is a difference between the Network/National IFA and Service Provider models. However, even the latter will struggle in a post-RDR world, as increasingly they will need to justify their position in the value-chain for both the Adviser and the Client.

    Few IFA firms have actually undertaken any analysis of how they actually spend their time ,so identifying ways in which they can improve productivity is almost impossible, and Chris is correct in his assertion that many of the services provided by the ‘Gorillas’ can be provided by readily available technology, although it can be obtained for significantly less than the figures quoted.

    Ultimately, the only way IFAs can improve their productivity is by improving their efficiency and this involves either outsourcing non-productive tasks – compliance, commission reconciliation, research etc – to a third party or by deploying technology to undertake these tasks more efficiently, allowing the Adviser to do just that – Advise.

    None of this however can be done without first analysing exactly HOW they are spending their time at present.

    This leaves one major area where Gorillas can potentially add value, which is in the arena of training and business development, perhaps with a view to both ensuring continuity of independent advice in the marketplace and in creating a method whereby existing advisers can structure a viable exit strategy.

  5. I think, Mr Gilchrist, that you are missing the point. Yes, a small IFA can do all the things a large IFA can, but the costs involved are not as trivial as you may think, and there’s then this little diseconomy of scale that relates to time spent running a business compared to actually acquiring and advising clients, which is the lifeblood of any IFA, small or large.

    I don’t dispute for a minute that there have been some spectacular failures amongst the “national” ranks – Berkeley Berry Birch, Inter-Alliance, Millfield, Park Row, the list goes on, but that’s not to say that there isn’t a place for a national. The problem that most of these firms appear to have had is that they acted like a national but allowed their IFAs to act as individuals – a national will never create value (to its IFAs or shareholders) whilst trying to be all things to all people. In order to succeed, a national needs to define what exactly it is that it’s going to do – what proposition, what level of support etc. etc. and then stick to it. Otherwise, it will come unstuck and end up being nothing more than a commission club.

    I have no connection to Towry Law, and understand some of the bad feeling towards it, but Andrew Fisher is at least clear on what his firm stands for, and what it does and does not do. I have a feeling that, in the long term, it will do very well. Agreed, HL is not an IFA and smaller IFAs are almost without value for third parties as they are largely lifestyle busineses for the principals, but that doesn’t mean there isn’t a place for the national model. In the pending days of higher qualifications, adviser charging and greater regulatory scrutiny than ever before, I actually think that the market is wide open for a well-run national to provide services to IFAs who would rather spend their time dealing with clients than with all the issues involved in running a business

  6. Of course it’s true that as Chris Gilchrist says, no-one’s going to make big money trying to build a “national IFA” business if being a “national IFA” means selling various centralised services to small, local IFA businesses.

    But who says that’s what being a “national IFA” means? Being a “national food retailer” doesn’t mean trying to sell centralised services to corner shops, it means being Tesco or Asda. Being a “national professional services firm” doesn’t mean trying to sell centralised services to small local accountancy firms, it means being PwC or BDO….well, you get my point.

    The big idea that Chris misses is that large national IFA firms will replace most of today’s small corner shops, not act as a supplier to them. When will this happen? Whenever the industry’s numbers start looking a bit more attractive to the people who will have to provide the capital required. That tipping-point may still be a long way off. But whenever it’s reached, all the evidence from almost every other sector of the consumer economy says the shape of the industry can, and will, change very quickly indeed.

  7. More opinions than you can shake a stick at.

    The answer is diversity, he may be quite correct in that the big firms cannot possibly survive as IFAs, what this man suggests as being the way forward should be brought to the attention of the regulators.

    Consumers lose out again!

  8. Post RDR I think Networks would be best advised to look to Restricted Advice. This could still be whole of market which is what most people want but would recognize that proportionately most IFAs really only give simple advice.

    The relatively small complex Independent advice market is probably best served by small regional operations rather than one man bands.

    If networks or sole traders try to work the complex market many will find there is just not enough room to be profitable.

    The real action will be in the Restricted whole of market area.

  9. I would ask anyone who is currently practising in this business who they can rely on. Not the networks, not the life companies, not the investment houses not even their clients. The only person they can rely on is themself.

    Having been a past Burns Anderson member for some 12 years, like Chris from near inception to the year 2001, they did nothing for me. I still had problems with pension review, endowment review and the splits debacle despite their wonderful research and compliance departments.

    How did they defend me against any of those. Not at all is the answer.

    What did they do for me in marketing – nothing is again the answer.

    What did they do for me as an individual, line up free training from the likes of the life companies which was available to most other IFAs.

    The world is constantly changing and no doubt Tescos, HL and the banks will gobble up more of the market share, but we will prosper on selling advice not product and giving a far more personal service.

    Why should these mass market boys prosper in the future the banks have been trying it for years and miserably failed so that they have little or no credence at this time.

    All is not lost for the sole trader and whilst he may not be able to sell his business and make a vast profit at closure time, he can and will make a steady profit over the years he looks after his clients.

  10. Lucian, I don’t think I did miss this big idea. I think competitive advantage is what drives consolidation. My point is that in the IFA model, there aren’t significant benefits of scale, so corner shops aren’t a good analogy. On the other hand, I agree that restricted advice can be Tescoed and probably will be.
    The vast majority of small businesses still get accountancy services from local firms, ditto solicitors. Why would you expect fee-charging IFAs to be any different?

  11. From a consumer perspective ‘Hoover’ became synonymous with vacuum cleaners many years ago, and ‘IFA’ has become synonymous with anyone providing ‘advice’ on investment products!
    The article, and most of the comments, use the term ‘IFA’ in this generic way; most individuals providing ‘advice’ on investment products are, technically, whole of market advisers – few are ‘IFA’s as (re)defined in FSMA 2000 (its to do with actually charging fees as opposed to offering it as an option).
    Point being we get inconsistent reports about the ‘number’ of ‘IFAs’ (somewhere between 20,000 and 45,000) and different understandings about what an ‘IFA’ business is;
    HL is as much an ‘IFA’ business as many of the others quoted above!
    The banks tend to run (large) bancassurance and (small) ‘IFA’ type operations – and make money from them collectively by offering a wide proposition to their customers.
    The degree of economic success lies in having an adaptable business model that actually starts with the customer – just look at retail where there are good and bad big and small shops. Size, in itself, isn’t the thing. Having a carefully thought through business model (that works) is.
    One of my previous roles was as MD of a national (Towry Law 1991 – 94, a period that included a very successful main stockmarket flotation) and business success or failure hasn’t, in my limited experience, had much to do with size per se.

  12. the small IFA can offer close working relationships with clients, we decided 5 years ago to do this.

    The other area that the small IFA can gain is being nimble to changes in the market and a vision for the future.

    Enjoy the challenge of a changing market and constantly upgrade what you do for a better offering.

    The thought of national IFA’s has always been a mystery to me regarding profitability, and how you cover huge overheads but still provide the right client needs.

    However I do recognise that quality of the client bank could be an issue

  13. Who says you have to buy an off the peg back office system.

    Take a look at

    Not my product but free – and written by IFAs for IFAs

  14. I actually work for a very successful national IFA. They provide a lot of added value to my business in terms of support and lead generation. I can also paddle my own canoe if I want to and as a reward I get a higher percentage of the business income . I write including ongoing fees/commissions.which is competitively positioned. I think the secret however of the firm I work with (not for) is the diverity of it’s product proposition (ie not just traditional financial services, but also other related client products that create income streams in their own right which both suppliment and create new income opportunities.

  15. with regard to not being protected from the endowment, pensions and split cap problems, as a colleague just mentioned as we are reading this, werent these only a problem for advisers if they were mis-sold?

  16. To Anonymous | 8 Dec 2009 10:49 am, I do hope you are being sarcastic/ironic as although since1998 I’vce only had one complaint and it was no for endowments, I am ware of people who became clients afetr they had complained abotu their endowments arranged by otehr advisers and personally I think it unlikely the adviser misled/misold anything.
    Having compared my forst complaint letetr from a client against the sound recordings of what was said and file evidence of what was written, the clients recollections as stated in their letter bear no resembelance to the paper file and for me, more importantly what was actually said and explained to the client.
    In any other job or if the case went to court, then I could reasonably expect the court to find in my favour (in fact I’d expect it to result in a heafty bill for the client or an accusation of both libel and slander, but in the court of the F-pack, who knows what the result will be!

  17. I am delighted to see someone, indeed anyone, of stature saying in public that big is not necessarily beautiful in financial advice. It is a point I have been making on a regular basis for the last 10 years.
    With a few notable exceptions (exclude Towry Law who were kept afloat in a very irregular manner) there are few large, successful and long established IFA firms. There are even less that are an established “Brand”.
    Guessing at the reason I would suggest that it relates to the fact that the financial advice industry has been a sales industry, and successful salesman generally have a large ego, that functions better in its own environment.
    Align this with the fact that advice (or sales) is person to person and the natural size for a firm is probably small rather than large.
    The problem that we have going forward is that as advice becomes more like advice, and client needs become more sophisticated, a small firm cannot carry the cost of an adequate research arm. These needs can be outsourced, but there is nothing like the organic development of sophisticated ideas and solutions.
    I would agree with Chris Gilchrist that the natural size of an IFA is smaller rather than larger, since the change in law, taxation and the economy means the IFA must be capable of reacting quickly. The unresolved part, so far as I am aware, is how to create a dynamically creative aspect to the advice given.
    This is something that Networks should have given, but singularly failed to do.
    Insurance companies used to provide intellectual input, but are now too few to need to be competitive in that area, and are, in any case, too concerned with their bottom line.
    The main concern though is that normally “the market” determines its own best structure rather than a Civil Service organisation. If the FSA introduce pressure to increase the size of firms, and this is against market demand, the future of the industry will become very uncertain, because the resultant structure may suit no one – especially the client.
    Isn’t it amazing that the first time the client is mentioned is at the very end – which appears to be the problem with most of the discussion now taking place in the industry.

  18. There are huge potential economies of scale. But they can only be realised when advisers sign up to a systemetised approach to doing business and a viable payaway.

    Advisers still expect 65%+ of gross, while sole trader net margins are usually less than 50%.

    Many IFA’s still think the independent label means “no one tells me what to do” rather than describing their client relationships, so they don’t want to work within the system that a larger business requires to control compliance risk.

    Until they do, with one or two notable exceptions, getting a large group of IFAs to really work together profitably will continue to be akin to herding cats.

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