As some of you may have read, after 14 years running a stand-alone IFA, Ray Peyre and I have sold 50 per cent of our company to Aegon UK.
I do not want to use this column to discuss my own business but I would like to show why part of the reason for our decision was that IFAs in Britain have the worst cashraising potential of any industry I know.
So far as I am aware, we are the only industry in the country with regulatory controls that prevent us from raising capital to grow – the entire basis of capitalism.
The problem is that all regulated firms have to pass FSA solvency tests to show they have sufficient reserves. As you grow, your cash reserves have to increase to match your turnover, expenses and number of RIs. Loans count as liabilities so, unless you can get your bank to subordinate the loan (you should be so lucky), a loan will make you insolvent.
Beware, too, that there are some nasty catches for those of you with expanding firms. When you breach the 25-RI barrier, your cash requirements suddenly soar. In our case, it turned our most profitable year ever into one of our lowest personal earnings' years as we had to leave hundreds of thousands of pounds in the business to meet the sudden increase in the solvency test.
Effectively, therefore, IFAs of any size cannot raise capital from the banks and stay solvent. So most of us try and grow out of profits. That, in itself, prevents rapid growth but how much more difficult will this challenge be in the future? “If you can keep your head when all around you are losing theirs” perhaps you have misunderstood the potential implications of Sandler, Pickering and CP121.
Also, how can anyone plan properly in an industry when we do not even know the rules we will be playing under in two years time?
In my army days in Northern Ireland, we would spend one week in three as “back-up platoon” waiting to be called out as a reserve. One tour was in the long, hot summer of 1976. We spent day after day lying in the shade wearing full riot kit and trying not to move. Playing cards became so boring that in the end the gunners would play three-card brag and just “go blind”. In other words, they would bet without even looking at the cards.
I can't help remembering those days each time another inquiry or consultation on our industry is announced. We are all betting blind in financial services and our bets are a good deal higher than those of the gunners. How can we risk expansion without capital backing and how can we get capital if we can't borrow? Answer – we either have to sell equity and take partners or the product providers have to provide a capital scheme that subordinates the loans.
This latter route looked like it might be on the cards until CP121 came along. Now, equity purchase and partnership/ ownership is the name of the game and one that looks as if it will get very much more intense soon.
So, is this the death of independence as we know it? Some commentators have gently mauled our own deal, one going as far to suggest that we cease to be “genuinely independent”. I must say this comment baffled me completely. What about Chase de Vere, Charcol, Sedgwick, Towry Law et al – are they not IFAs?
An IFA firm is independent by definition if it deals with all companies in the market and acts as the client's agent. What difference does the ownership of the company's shares make? Other than obeying the better than best rule while it exists, we will deal with our clients in exactly the same way we always have and so will the many other IFA firms that raise capital from product providers in the coming months.
In the future, it does now seem, that the only choices for IFAs will be stay small, float on the Aim market, a taxing goal for even the bigger firm; or raise capital from product providers.
I believe that many firms will follow the strategic partnership route. Indeed, I personally know of many that are looking for alliances at this moment. Many others will also be disappointed. The providers really do seem to have learnt the lesson of the estate agency debacle and are not keen to repeat the error of buying in haste.
It has looked for some time as if rule changes and inquiries would alter the entire shape of the IFA industry. Now, it seems, the times they are 'a changing.
Philip Rose is managing director of Wentworth Rose