You could be forgiven for thinking the Government has got it in for us. It wants to drown IFAs in a sea of regulatory paperwork, kill them off with depolarisation, judge their past business practices by today's more stringent measures and make them pay for Government-led omissions or mistakes that have led to the mess of financial services regulation we have now.
The number of small IFA businesses will plummet as many choose another profession or decide to take shelter in a multi-tied environment. The loser will be the confused ordinary man in the street.
What can the beleaguered small IFA do to deal with the prospect of a slow and painful demise? Let us consider the economics. Why do we work at all? The answer for many, including myself, is that we are not wealthy enough to choose not to. The goal for IFAs should therefore be the same as for our clients – to work because we choose to, not because we have to. In other words, to achieve financial independence.
The goal for many IFAs is to achieve an exit route at the earliest opportunity. The IFA needs to consider whether their business can be used to secure this financial independence. Building funds under management is the key to having a saleable business – a business with positive cash flow from recurring income and not dependent on new sales.
Fund-related commission offers the IFA a way of meeting the very tough financial demands that the 1 per cent world will bring. Together with retainers, renewal commission and fees, it will provide the financial stability needed to face the future with confidence.
IFA businesses which depend on taking full initial commission will find the future very tough. My business made the difficult decision almost two years ago to take all regular-premium business commission on a non-indemnity or level basis. Similarly, single-premium business is secured on a reduced initial and fund-related commission basis rather than initial commission only. This reduces immediate income but we are feeling the benefit of an increasing cash flow.
Is fund-related commission a reward for servicing? If the IFA takes fund-related commission, does this mean he has to provide an annual review for the client even though he has chosen to take less initial commission? More important, if full initial commission is taken, does this absolve the IFA from providing the review?
Much will depend on your interpretation of the purpose of fundrelated commission. Is it a reward for providing service or is it an option to the IFA to take a longterm view to earn less income today but build a sound business over the years?
We made the sacrifice of less income today for more income tomorrow. This was a considered business decision on the basis that renewal or fund-related commission is a continued reward for the initial introduction of business and not a reward for continued servicing. This position is borne out by a number of providers' commission agreements.
It is clearly important to service existing clients to ensure your relationship remains strong but the position regarding fund-related commission should be understood clearly. If clients want an annual review and ongoing service, this should be made available at a commercially realistic price.
Establishing your practice on a sound footing will help you weather the storms. Positive cashflow is the oxygen your business needs to survive.
Carl Melvin is managing director at Millbrae Financial Services
