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IFA tortoises will beat hares

The antics of the hyperactive builders of national IFA empires would be amusing if they did not have such a strong whiff of humbug.

What they are really doing is using the values of the IFA brand to build what will become the equivalent of direct salesforces after 2012.

Under the retail distribution review proposals, national IFAs will almost certainly offer restricted advice. I have yet to be shown how anybody can build a national IFA that fulfils the quite onerous requirements for a genuine IFA as the FSA has defined them – full research on all markets and products that could be appropriate for the client.

Of course, you can do the research but that is the easy bit. What nobody has explained is how they can deliver this professional IFA service to a consistent standard across the nation.

I believe the only way you can deliver a national service to common standards is by making it restricted advice and that is what national chains will do.

Now watch the gymnastics. The empire builders will say there really is not any difference between full professional IFA standards and restricted advice – it is only terminology, after all, the fee-charging methods are the same. They may be helped by the fact that some of the bank wealth managers, who want to go on selling their clients the bank’s own structured products, are likely to fail the independence test. A large chunk of the current IFA sector will try to pretend that a restricted advice proposition is as good as full independence.

That example makes the point about the difference. The banks do not want to have to assess all their rivals’ structured products – they want to sell their clients their own. The restricted advice regime will allow them to do that.

National IFAs offering restricted advice will not be able to drink from the deep well of profits available to the bank wealth managers. But they will, I am sure, find ways of making a bit on the side.

If you are building a national IFA, you do need to make a bit on the side, especially if your dreams include a stockmarket listing.

The real battleground for the new regulator after the RDR will be the attempts by purveyors of restricted advice to dip their beaks in the product profit pipeline.

Managing your own funds is the all too obvious one, and demonstrates how a lot of people still do not understand what the words “professional adviser” mean. You cannot be a professional IFA and run your own funds. You have stopped being an adviser.

I think it will take a few years after the RDR for the public to get it. Genuine professional IFAs will be few and far between.

Restricted advice providers will range from the production line (such as the banks) to the iffy (people who used to work for life companies pretending to be IFAs). Genuine independent IFAs will mostly be small firms. Unlike the restricted advice chains, they will – as other professional firms do – sink or swim solely on the basis of the quality and value of the service they provide, and will get most of their clients from referrals.

I reckon these tortoises will be around long after the hares have become somebody’s lunch.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. Whilst I agree with what much of Chris has to say, the issue of ‘distributor influenced funds’ is much misunderstood. If used purely as a cynical move to boost earning while offering no value then they are clearly a bad thing. However, if used properly, as I know they are by many firms, then they provide an excellent vehicle for firms (especially firms with multiple advisers) to professionally manage their clients assets in a consistent manner (rather than each advisor doing their own thing), by qualified professionals (IFAs aren’t investment managers) on a day to day/month to month basis rather than switching fund once at annual review, which is clearly inadequate. Used in this manner they provide excellent value to the client and i see no reason why the firm provding this is unreasonable to expect getting paid for it.

  2. Segregation of sales force is the answer Chris and flexibility. Presently we a National IFA have IFA only, IFA/Mortgage Brokers and Mortgage Brokers who all work within the same camp and efficiently. The processes adopted by the company manage this very well with no blurring. Terms of Business are segregated and so there is no confusion for the client.

    What I believe will happen is that the company will have IFA’s offering full advice and Restricted advisers and mortgage advisers and yes the model will have to chance to achieve this. Not only that but the whole company structure must be evaluated and the decks cleared to enable a company to effectively have ‘a clean sheet’ post RDR. My company (I am an advisor not owner) has already indicated that this is being done and I am confident that we will have all of it in place by the end of 2012 and so you point I’m afraid is not valid. Small IFA firms will not survive in my opinion post RDR and so it is very much a case of watch this space.

    With regards to your point on managing your own funds I agree and the TL, HL and Buckles’s of this world will find it difficult to carry on other than as restricted advisers post RDR and certainly as you say will not be a true professional IFA, even if you could call them that now.

    The issues are what is your company doing about restructuring to be ready for the post RDR era. I get the impression that most are not doing all they could to be ready, perhaps in the vain hope that it won’t happen and this is certainly the case with the small, one man band IFA’s.

  3. Mr Old Fashioned 27th August 2010 at 11:11 am

    We shall continue to provide independent financial advice and have taken the view that we will not have “distributor influenced funds”. We want to be able to advise clients to switch out of funds that are not performing as expected.
    If we had our own distributor influenced funds and they were not performing as expected, for whatever reason, how could we advise clients to swich out of them without looking silly?
    We are definitely tortoises. We have 8 advisers and the company continues to make profits, which is quite unusual for an IFA, I understand.

  4. Steve Buttercase 27th August 2010 at 11:40 am

    It is not all plain sailing but I agree with Chris. Large IFAs need to develop alternative income streams – ether by annual fees on platforms or by “strategic relationships” (tied). There is also the distributor influenced fund as well of course. This is because once you have ten advisers you need a manager, a paraplanner, an administrator and of course a slice of a compliance officer. All from the same hourly fee? Can’t happen. So the only Post RDR models that will work are small, professional and lean true IFAs or big, influential and at least partly tied corporates looking at quick exits from flotation or sale. I know which I want to be.

  5. …the question that doesn’t get sufficient airing in my view is.

    “what is an IFA?”

    Today, the term ‘IFA’ covers a multitude of different business models ranging from the small jobbing broker for whom mortgages and related life cover generate the majority of income, but with additional life and pensions and perhaps the odd bit of investment business for clients – to ‘wealth management’ arms of banks who are basically interested in hovering up investment funds.
    None of these business models is inherently good or bad, right or wrong – they are just different and a lot of commentary I see reflects the belief that only one business model (usually the ‘financial planning’ one where the proposition is around planning rather than product sales) is a ‘true’ IFA.
    Post RDR implementation, consumers will have the same problems and similar business models that exist today will exist tomorrow – with some new ones no doubt. What they are called shouldn’t matter too much.
    We have worked with a number of firms (mainly larger ones – because they are prepared to pay for the ‘help’ and we are a business) and once the emotional link to the name ‘Independent’ is broken all sorts of things become possible.
    There will be firms who want to manage clients’ money and others who want to advise on clients’ financial planning needs – and even some who just want to sell a product. Personally, I don’t see any of these models as ‘bad’ – but I do believe the RDR will force firms to be honest with clients as to what they are and how they do it.

  6. The point is, just how many IFA’s, in practice, have EVER operated on the basis of undertaking a comprehensive programme of research across the entire market for any client? It’s a nice idea but totally impractical. in the real world, I suggest, nobody actually does it.

    You’d need to charge a fortune for the amount of work involved and would the client really want to spend the time and money examining all the reasons why you’ve eliminated 99% of all the options or products you’ve looked at? Of course he wouldn’t. He just wants you to outline, in summary, a range of options with the pro’s and con’s of each and help him to reach an informed decision as to which one is likely to be best for him.

    The WoM bit only applies in terms of of being able to investigate, analyse and advise on whatever a client may bring to you that he already has.

    This whole debate is getting decidedly anal if you ask me (as is much of the RDR).

  7. Can we all please stop writing the plural of IFA as IFA’s when it should be IFAs.

  8. I feel that Chris has put his finger on a very important issue. One that could do with a much wider airing. One could wax philosophical about what is and is not independent, but many of us do have a fair idea and it never seems to include the big operators.

    Julian made a very valid point – no one would literally comb the whole market – there would never be a conclusion if they tried it. But the industry is being softened up for the second best. Even AIFA (much to my regret) is postulating the restricted option.

    The providers are salivating at the thought. For the big outfits and networks owned by the providers it is now payback time. These providers are not charities and they will now seek to get a return on their outlay – and what better than Restricted?

    As for the others, I am now watching with interest to see what inducements will be on offer. I wonder how many corporate hospitality suites at football stadia will be bought by providers in 2012/13? (Tickets for Monza or Monaco anyone?)

    To me independence means the independence to set your own tariff and to be independent of any external organisation or management group. How would that definition leave someone who worked for (say) Towry Law or was a member of (say) Sesame? Indeed could anyone who was employed (rather than the owner or partner) say he/she was truly independent?

    These are not statements, but questions to (I hope) widen the scope of debate. Those who will remain independent through RDR really need to know what space they occupy and those who are wavering need to know their place too.

    Thank you Chris for bringing the debate into the open. One has the impression that the Regulator may live (in one incarnation or another) to ponder whether they have pulled down the temple or rebuilt it.

  9. Surely it’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong Chris, this would certainly suggest that having one investment strategy for each degree of risk is a good idea and trying to stop amateurs like small ill informed IFA’s “having a go” would be good for all concerned

  10. An excellent piece picking up on the key alignment of interest issues. I for one would love to see the DIF firms put firmly in the “not independent” box alongside bundled platform charges.

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