One of the hottest topics in the run-up to the RDR is capital adequacy which has been thrown back into the spotlight recently as the FSA is looking at it in relation to wrap platforms – something that has not happened before.
I welcome this subject being back on the agenda as it is essential to IFAs and any business. Businesses need to be mak-ing money or their future looks bleak and this is especially true for IFAs in the current situation.
There is a football analogy to describe the current financial situation of IFAs. IFA firms are like football clubs – they hire their star players (advisers) who make a good living and a good amount of money. But the IFA firms themselves are broke. In order to keep these star players, we have to pay them more than we can afford while dealing with the spiralling cost of bureau-cracy and regulation. This all adds up to the fact there are few IFA firms making any money. Good players inevitably mean good turnover but I think it is essential that IFAs should be forced to retain more capital.
IFAs are starting to realise the importance of having a strong balance sheet – if nothing else, it is reassuring to know we will not be closed down if there is another downturn.
But although capital adequacy is a fundamental business principle, I fear that the FSA could push things too far to the other extreme.
I have noticed that quite often, measures brought in by the FSA to make things work better have had the opposite effect.
Good firms are looking for a regulatory payoff rather than more regulation.
For example, when the FSA introduced depolarisation, it managed, in my opinion, to polarise the market more effectively than pretty much anything that had gone before it.
Now we are seeing business consultants such as Ernst &Young taking the view that restricted advice may be the best option for many in the advice sector. If they are right, this will mean further haemorrhaging of IFA numbers.
So while capital adequacy is an important part of our industry, I hope that this is something that is kept simple and is not overcomplicated.
It is inevitable that many IFAs will be pushed out of the advisory arena – as with any crisis, the good will survive while the poor will not.
These are challenging times for everyone and steps must be taken to prevent the good from going to the wall, simply because they have failed to meet an arbitrary level of capital.
Bruce Wilson is managing director of Helm Godfrey