The economic model of the IFA sector may not be viable, according to FSA managing director David Kenmir, who believes substantial reform is needed if IFAs are to continue to thrive.
Kenmir claims most firms are substantially undercapitalised, with the main financial risks coming from their back-book of business rather than that currently being written.
Using a rough calculation, Kenmir told delegates at the Money Marketing Live event in London last week that the maximum number of clients available per adviser is 2,300 – which could only be reached if all 60 million UK residents sought independent advice.
Kenmir said the tendency among IFAs to strip out capital from their business at every opportunity has played a large part in this undercapitalisation. So has the transient nature of advisers, with RIs regularly changing firms and taking trail commission streams with them.
Kenmir warned that a further threat to IFAs could come from reasonably high-profile MPs, such as those on the Treasury select committee, taking an interest in trail commission.
Pointing to recent concerns over networks being forced to charge VAT on fees they charge members, Kenmir said if the Customs and Excise policy reversal cannot be successfully appealed, it will add more costs.
Kenmir admitted that the costs of PI insurance, the growing compensation culture and regulatory red tape have all played their part in pressuring margins and repeated his message that, in an ideal world, PI would not be mandatory.
He also cautioned IFAs over so-called “phoenix firms”, where a company is wound up, thereby ringfencing potential liabilities, and said they should not be viewed as a “free meal ticket to wipe away losses”.
Kenmir said: “The economic model of IFAs may not be viable and a number of factors have contributed to this. Saying that, I fundamentally believe there is a bright future ahead for firms able to adapt to the changing marketplace.”
Money Marketing Live, p17, 18, 20