My background is not in mainstream financial services. Over the last three decades, I have built many businesses in different sectors around the world, including petrochemicals, automotives, IT, training and health insurance. So it was interesting to come in to the personal finance sector, observe the differences and similarities to other businesses and spot the gap in the market in which the seeds of Destini have been sown.
In the process of buying 20 IFA firms to date, I have met many more. This has provided me with plenty of opportunity to explore the nature of the IFA market. Most strikingly, it appears that this cottage industry has reached a point of no return where its strengths have become its limitations and the pressures to transform are now intolerable for many.
There are always reasons to change, especially as a result of external factors, but the key is in our response. How well equipped are we to prosper, no matter what is thrown at us? IFA businesses have found change difficult and I will share my views as to why this is.
Most of the businesses I have met were set up by IFAs who originated from a sales background where the focus was on production and client servicing. They set up their own business to provide a better service to clients, many of whom they often brought with them, and retain more revenue. They did not generally have plans to grow a big and complex organisation.
A disadvantage which many experience is that while they may have excellent verbal communication skills and are adept at explaining complex financial products, their broader business skills are often limited.
Historically, there has been more than enough revenue for small practices to support a comfortable lifestyle. There is usually little in the way of reserves or inward investment. This is not a problem when the going is good but it makes life tough in adverse trading conditions such as now, with reduced commission, increased regulation and future uncertainties.
In most other sectors, things are different. Entrepreneurs usually start with a business plan which shows several years of trading before break even, let alone profit. The existence of a plan helps to identify the skills, structure, strategy, style, systems and staff required to accommodate growth. It also builds in a contingency plan should things go wrong. Many would-be entrepreneurs go on a business course and most enlist the help of a professional in putting together their plan.
Typically in IFA businesses, core functions are limited to sales, admin, research and regulation. Even then, those who join a network or use a service provider take personal responsibility for only a couple of these. This is very unusual compared with other sectors and is the result of ct providers recognising the IFA as a valuable distribution channel. Nowhere else do businesses have products designed and packaged by a third party which also pays them and takes away a large part of the financial function, provides training and gives marketing assistance. Had IFAs even had to collect their own income, they would be much more advanced on technology.
Most IFA firms seem to hit a glass ceiling at a turnover between £500,000 and £1m. More sales mean more staff, computers, furniture and space. There are also extra responsibilities which encroach on management time such as supervision and training. Marketing may also be required to ensure the team stays busy. Most of this happens without a business plan or an evaluation of profit before deciding what to pay new staff or what revenue is required per client.
There is a further problem for those who belong to networks. As their businesses grow, they tend to develop more bespoke needs which do not fit the network model. But there are significant barriers to exit. Often, pipeline revenue is frozen, putting pressure on working capital for the new venture. It can take a year or longer to replicate the technology and systems required to track commission.
All problems are surmountable and IFAs can join in a profitable experience if they create a more rounded, commercial and conventional business model. The old adage applies here – turnover is vanity, profit is sanity.
Courses on preparing business plans, developing cashflows and understanding management accounts would be handy, not to mention negotiation and presentation skills required to win corporate business. An understanding of funding – both debt and equity methods – would come in useful, as would the availability of general business consultancy for firms to use as they please (pioneered by Axa).
Trade bodies could perform an additional role of connecting the IFA community to other business sectors to facilitate wider experience and exposure to different business models.
With the correct skill base and business structure, the IFA sector has a great future and businesses will be increasingly valuable. However, a change of mindset is essential so that strategy and planning is introduced at an earlier stage, instead of being a knee-jerk reaction to crisis or an addendum to sales.
David Collett is managing director of the Destini Group