Durlacher analyst David Pannell says the breakdown of merger talks between Inter-Alliance and Berkley Berry Birch demonstrates the significant issues facing the IFA industry.
He says personality, misselling liabilities, and the inability of the sector to demonstrate a profitable business model all lead to the decline in talks.
Pannell believes until the larger IFAs consolidate, quoted IFAs will continue to experience low market ratings and little interest from investors.
However, he says he is “pleasantly surprised” by Inter-Alliance's recovery so far, with what he sees as a very positive trading statement, ahead of expectations.
He said he was particularly impressed Inter had managed to retain advisers as his estimates for this year (revenue £75m and adjusted loss of £1.5m) means that with a “fair wind” the business may not need additional cash before it achieves profitability.
Pannell says: “It is ironic that trading statements from the two businesses were positive. Both BBB's and Inter's trading statements report a sharp recovery in IFA productivity and revenues. For example, Inter's reports revenues up 23 per cent in Q1 2004, versus 2003.
“Both have cut costs significantly, for example Inter-Alliance's overheads have fallen from £36m in 2003 to a current run rate of £21m. Looking forward, we believe BBB faces more serious issues than Inter-Alliance. During the merger process it lost its chief executive and its financial director announced his decision to leave but later withdrew it.”