I noticed Plimsoll has recently published a very interesting report. For those of you who do not know Plimsoll, they are the firm who get all the information from Companies House about firms in our industry and print them in a very well presented bound guide and then try to sell the guide to us so that we can stare at the information about our own businesses which we filed at Companies House in the first place.
The gist of the report was that 15 of the top 100 IFAs are in financial danger. It shocked me that it was only 15. I then realised, of course, that you do not have to file your accounts for six months which means, on average, the information was at least 18 months out of date.
Since then, the market has fallen, we have had a diabolical Isa season, the staple diet of IFAs – namely the with-profits bond – is no longer the shovel 'em in product it was, we have had the zeros debacle and are about to enter the 10 per cent guaranteed income structured product debacle.
When you add to this the volume of soft stuff that is going to hit the fan over endowment mortgages, you can rest assured that if the accounting periods ranging from those ending December 30, 2000 to December 30, 2001 were bad, they will make the next year's trading look like a boom. I suspect that had Plimsoll got up-to-date information, we would have been appraised of the fact that only 15 were not in danger.
It irritates me that many of the people in the industry glibly state that the market is about to turn round and everything will be hunky dory. Well, the market may turn around although that is a considerable leap of faith but even that will not leave investors clamouring for our services. It took six years for investment sentiment to turn round after 1974 and five years after 1987 and, make no mistake, the situation today is much worse than in 1987.
Most of the young turks managing these big IFAs today were probably totally insulated from the 1987 debacle in that, then, most products were not as investment-oriented as the market is today. More importantly, in 1987, there were products available which were still saleable such as guaranteed income bonds and the ubiquitous with-profits bonds was just coming into the marketplace.
1988 and 1989 saw a bonanza in endowment mortgages and indeed much of the industry in those days was preoccupied with protection or regular savings through pensions or endowment policies. Nobody gave it a thought that with-profits funds actually invested in equities. You then add to all the above the fact that most of the young unseasoned managements have had the huge problem considering the wider implication of Sandler, Pickering and CP121.
Even that is not the end of the problem, investors prompted by regulation and the press have become obsessed with charges. Today, the disclosure of commission has driven down the individual earnings on each specific client's planning at a time when there are fewer investment cases seeking advice. The Plimsoll report indicates that “an element of cannibalism will emerge as some (IFAs) disappear completely or get taken over” and “that nine of the major players were heading for trouble in trying to buy market share”.
If I am right and the investors are scared off for the normal time that a bear market scares them, that must be the understatement of the third millennium. The only members of the top 100 who will survive are ones that have extremely deep pockets and extremely good business models or have a parent with even deeper pockets.
Interesting times are ahead. But if you think things are going to get better in the short term, just think about this. Right now, the investing public think the market is cheap but they are not putting their money in. The performance figures look diabolical over one, two, four and five years.
In a few months, they will look diabolical over the one period that is not too bad, that is, three years. The problem is that if the market goes down, investors will become more afraid if it goes up people will think they have missed it. Five notches on the belt are required, that is, tightening not slackening.
Peter Hargreaves is managing director of Hargreaves Lansdown