Compliance, compliance, compliance. By common consent three of the most frustrating and stifling issues threatening the development of the IFA industry in the UK today. But compliance is but three, well OK, possibly just two, of the factors that will affect the successful organisations.
One thing is certain -the IFA market has no special right to survive in the future. The same applies to product providers, fund managers or anyone operating within an industry that is being subject to some quite fundamental changes.
So what are the success factors? Size? Consolidation and knock-on efficiencies? Profitability? We have gone from people thinking that the multi-tie structure would prevail to thinking that is starting to change, with size creeping up the structuring for success ladder at the moment.
But is that right? Consolidation can give advisers access to a source of capital to grow their businesses. With revenues plummeting, yet fixed costs increasing, it can allow for the merger of back-office systems, lifting a heavy burden of compliance and administration leaving more cash to expand the business.
How much value can be delivered in a consolidation process? Turnover would measure the value of the brand but not the potential for profitability. Has the industry placed enough emphasis on profitability in the past or, indeed, been allowed to?
It has been said that current consolidation in the IFA industry is being driven by turnover and the potential for enhanced future profitability in tomorrow's world, not necessarily the profits of today.
This moves the emphasis to structure. Manufacturing margins are being cut to the bone. You only have to look at many fund management companies working on the most cost efficient delivery of product to customer to at least raise the question of traditional IFA delivery to required new world delivery.
Fund management companies are showing a keenness to deal with companies with open architecture and funds of funds.
To keep this part of the chain alive, emphasis must be on volume to counteract margin pressure. We are not exactly talking supermarkets replacing corner shops here but the emphasis has to be on profitable margins and delivery of volume. The clutter has to be taken out.
One often overlooked, simple and important aspect in any consolidation process is building and continual enhancement of brand. Most IFAs want to retain their brand. The motivation of change has got to support the company ethos and offer the ability to grow an adviser base and a back-office system to strengthen the business. Finance to train and research, offering clients the choice and flexibility of advisers also fit well into the must have to succeed category.
It is also of key importance that there is a cultural fit, with existing staff feeling they are an important part of the team and feeling contribution is important to the overall success of the business.
Independence will and must continue to win in the future. If the factors on which you make decisions change you lose the fundamentals of the business and its reputation. But the challenge is to make it fitter and continue the more business orientation of the independence. Oh, and more compliant. The regulator is not going to go away. Businesses that can work openly with tight management systems and controls will be the ones to receive a lighter touch from the regulator.
For those businesses, this will be less costly and quite obviously very welcome. Those companies that cannot illustrate operating in this way will have to change or they will be forced to leave the industry.
Peter Dornan is managing director of Aegon UK distribution