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
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