Investing in a quality IFA firm is a means of securing long-term return for the overall group, not about buying short-term sales.
Over the last 12 months we have seen a number of providers investing in IFAs. Critics have dismissed this trend as insurers rushing to “buy business” and secure guarantees of increased sales of their products as the “better than best” rule is set to disappear.
The reality is somewhat different. There is no doubt the IFA sector has flourished in recent years and will continue to do so. There is growth in the significance of distribution channels in addressing the savings gap and the potential for greater profitability of this end of the distribution chain.
Why would a provider invest in an IFA? The primary objective is to identify where value lies and where there is potential for future growth and profitability. But different providers may have different visions as to how this might be achieved.
For IFAs, the overriding concern is retaining full independence yet having access to capital to expand their already successful businesses. The key differentiator is often between being a minority stakeholder and a majority stakeholder.
A number of providers, including Aegon, have taken minority stakes in large IFA firms. No two IFA businesses are the same and each will have sought external investment for different reasons.
Many providers may have looked at this type of proposition with one eye on the potential development of multi-ties, as well as seeking to gain a share in the profits of large businesses seeking further expansion. By the same token, such IFA firms are keen to have shareholders who have a first-hand knowledge and understanding of their business.
A majority stakeholding in a quality IFA firm is made for quite different reasons. An outright purchase or majority stake brings a number of benefits to the provider – but increasing the volume of sales of the provider's product is not the objective. Investment is made with a view to the profit these businesses can bring to the provider in the medium term.
For such a move to fully benefit the overall group, ensuring the IFA company remains fully independent with the autonomy to develop its own business strategy is paramount. The key is to provide each business with the capital base to enable it to expand profitably but to create an environment where the management of IFA firms enjoy the freedom to grow their business as they see fit.
By investing in a number of different firms a provider can cover a number of core market segments. Thus a situation is created where while the companies are not in direct competition with each other, synergies can be identified and used to mutual advantage, experience shared and cost savings can be achieved through economies of scale.
Acquisition of IFAs also brings providers a number of added-value benefits such as the expertise of the management team and a greater insight into the economics of an IFA firm. The IFA firm can also benefit from the business expertise of a provider and the security to think about long-term plans for the business.
All investments involve an element of risk. The most successful acquisitions take into account not just an analysis of the financials of the company but also the people and culture acquired as an integral part of the business. Ensuring different business cultures are compatible is fundamental to the immediate and ongoing success of an acquisition. Mutual respect is key.
Investment in IFAs is a reality of the new landscape emerging in the financial services. However, like any investment, its success will be measured in terms of the value it adds to the overall group going forward.
The fundamental issue driving our industry forward is the savings gap which affects the UK population – and the ultimate goal of all players is to work to eliminate this.
Peter Dornan is director of group businesses at Aegon UK