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Independent view

There was an interesting theory being touted by many young, straight out of Oxford merchant bankers a couple of years ago.

Indeed, we were “flattered” to be approached with this wonderful get rich quick idea.

They came along to me and said: “Peter, you should just expand your number of IFAs.”

It did not seem to matter whether they were good, bad or indifferent IFAs. The fact remained that firms such as Mediolanum in Italy and MLP in Germany were worth zillions based on how many IFAs they had.

Profit just did not matter. It sounded like a dotcom bubble to me but these merchant bankers knew better since they were a whole six months out of Oxford. I managed without too much trouble to resist the golden opportunity.

I was reminded of the above situation when, earlier this year, I saw that a very well known, very big, very unprofitable national brokerage had bought another smaller but also equally unprofitable brokerage.

I suspect the chief executive was certain in the wisdom that life companies desperate to secure distribution would once again be coerced into parting with significant amounts of shareholders or policyholders&#39 funds.

I wondered whether this firm had been sold the fairy story worthy of Hans Christian Anderson of how to make your company worth as much as MLP.

Several firms, some of them quoted, some of them private, must have taken the story hook, line and sinker. I do not need to name them. You can find them in the list of biggest IFAs in the country and they are also at the top of the highest loss-making list too.

I suspect most of them today are all sat in meetings with Scottish Inevitable, the Birmingham Mutual and the Welsh Equitable explaining what a good idea it would be for those life companies to add a few more million quid to their coffers.

They will be offering this extremely good investment opportunity on the basis that they would give these life companies increasing amounts of very low AMC business receiving very high commission which will never be profitable to the respective life companies.

They will be keen to suck them in now because next year (which is certainly going to be worse than this year), they will all be committed to millions of pounds and they will then be able to go back and say: “Well, to protect your previous millions of pounds we need more millions otherwise we will go bust. How ever, you might be interested to know that our chief executive has doubled his salary because he has doubled the number of IFAs that are all losing money for you. So we need all this extra money to cover our losses and to pay our chief executive and his board to ensure we continue increasing these losses.”

I noticed that one firm has even invented a way of increasing losses exponentially by employing people and paying them commission not to do business but commission to recruit IFAs on the basis that 50 IFAs will lose twice as much as 25 (the good news is that this commission does not need to be disclosed under the Financial Services Act).

The recruiter commission does not only increase by the number recruited but the more they recruit, the higher their commission levels. It all helps to keep those lovely losses pouring in.

Well, the story that that merchant banker brought me was really good. I loved it to bits. Indeed, I might have been tempted. Interestingly, though, the share price of MLP was e174 at the time and today it is just e7.

He has not come back to me and told me he was wrong. Now those merchant bankers that were advising these companies that only numbers of IFAs is important all must know that MLP shares have fallen by 96 per cent so why has nobody told the life companies that – or the go-forgrowth IFAs?

You would have thought that an industry which had first-hand experience of the dotcom bubble would know better. What happened to Interactive Investor.com? A life company bought that, too.

Peter Hargreaves is managing director of Hargreaves Lansdown

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