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Martin Bamford: Is the IFA model ever scalable?

Lunchtime recently saw us trying to work out why no IFA firm has ever successfully scaled its business in the UK.

We could only think of three that have a truly national brand and quickly discounted all three for similar reasons – one is predominantly an execution-only business with a small advice arm, another is anything but independent and the third offers services with a perceived lack of independence. It seems IFA firms can get big, in some cases quickly, but not without sacrificing profit or quality of advice and service.

Looking through the list of the biggest 100 IFA firms by turnover, many fail the independence test or fail the profitability test, or both. Others would be better defined as stockbrokers, general insurance brokers or employee benefit consultants.

Networks and nationals, in the main, consist of disparate groups of individual advisers, each working under a common business structure but with largely separate working methods and approaches to advice.

Some of these businesses grow quickly by throwing money at recruitment, only to reach a certain size and see their advisers move to a competitor with similarly attractive joining incentives and lower retention charges. This is no way to create a sustainable, profitable business.

Consolidators are an untested model. They may or may not succeed in creating a successful national IFA brand in the long term. At this early stage in their lifecycle, it could go either way.

What is holding back IFA businesses or is financial advice ever scalable? Posing this question on Twitter seemed to suggest elements of what we all do are scalable but advice is not. It might be possible to scale the marketing of a brand, the approach towards investment advice and even the production of advice reports. These are all things where systems and processes can be applied.

Scaling advice itself, which is typically delivered on a face-to-face basis and relies on individual adviser relationships, is much harder.

Is independent financial advice destined to remain a cottage industry and is that a bad outcome? It might be better for the IFA business model to accept limitations in terms of scale than to reach for the stars and consistently fail. We might all benefit from a relatively small number of modestly sized firms doing things well, rather than a few Goliaths racking up substantial losses and attracting negative attention from the regulator.

Martin Bamford is managing director of Informed Choice


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There are 16 comments at the moment, we would love to hear your opinion too.

  1. I think the challenge is the quality of senior management in many of the large distribution businesses. Delivering profitability of a significant sclae poses challenges well beyond the actual provision of the service that the business carries out. The skills needed to for financial planning/management (the accounting version), operations as well as sales will usually be beyond those people who are simply good advisers.

    If you look beyond our industry, it is very rare that the CEO of a business was either the founder of the entity or is even trained to build/deliver whatever product or service that business does.

    This herein is the problem as it is difficult for many OMB leaders to either recognise the need to bring in external management, or if they do recognise it then to act upon commitedly.

    If you look at many of the large distributors they are generally a collection of middle management and successful salespeople. That is why they fail or struggle because, as they no longer do what they do best i.e. advice, they no longer deliver any value to the business.

    My thoughts are that the nature of large scale advisory businesses needs to change (scale and economies that go with it have to be good thing for all concerned if distributed correctly) and reality check on the limitations of those people running them.

    I hope my twopenneth is useful.

  2. I like your subject but I think new ways need to be found to solve your scalability question. Post RDR advice is going to cost to much for the average man on the street and he still deserves to receive advice. I expect technology and its continual improvement to change the way the industry works.

  3. I think IFA is scalable however there are a number of issues with your question. Firstly, despite the non-independence of your top 3, much of what all financial advisers do is for all intents and purposes “whole of market.” Only the investment elements of some large adviser brands are not indpendent. You also struggle with definition. If you were to compare the profession with solicitors, how many large companies or partnerships exist that focus solely, or even mainly, on private client? Almost none. IFA is a very broad church and perhaps you will find larger commercially focused firms that have a private client financial advice department. In fact this exists amongst many large companies and plcs already. The last point I will make is that, until December 2012, it has been and will be, too easy for 1 man bands etc to make a killing by being virtually unqualified but very good salesmen. This will change as RDR hits, the cost of business goes up, fee charging becomes more common and Chartered becomes the normal accepted standard for financial advisers. Even so, I think more specialists will emerge and private client will find itself as niche as private client legal services and will probably find firms becoming allied to accountants and solicitors. You are right to say that consolidation is yet to be truly tested, but having close knowledge of some of the biggest in the UK, they are likely to become a force to be reckoned with.

  4. The industry is choked with the poison ivy of regulation so much so it will be impossible for any new entrant to establish a client base deal with the myriad of regulations, examinations, and fees and make a profit. No sensible entrepreneur would enter into such a business or risk expansion of such a business when it is so choked with top heavy, box ticking, and ill thought out regulation. Financial services now come with its own Star Chamber, a quasi judicial legislator equipped with the powers of judge jury and executioner. To enter into financial services is to abandon your rights as a UK citizen, while our “B LISTER” politicians look on – the FSA couldn’t spot a “real” regulatory issue if it bit them on the nose!

  5. Simple answer ios No.
    The only model that would probably work is Franchising but management would be critical.

  6. Interesting topic Martin. Something we have been wrestling with for 2 years now.

    I agree with the comments so far and the obvious answer as I see it get back to costs being too heavy, risks too great and therefore profitability poor/unattractive. I cannot see those things changing in the near future given the regulators approach to problem solving.

    Our approach has been to look towards alternative complimentary services but delivered differently with process being at the centre of the proposition. Time will tell if it works. However your overall centiment is accurate.

  7. It is lovely when you see other people coming to the same conclusion you reached years ago. I would totally agree that IFA firms do not scale well. Think of Noble Lowndes, Sedgwicks and Norton Warburg (allegedly the brokerage who triggered the FSA 1986) who are no longer with us; Towry Law who are only with us by dint of a lot of fiddling. Networks that have come and gone.
    It is difficult to determine all the reasons for this phenomenon, but one that springs to my mind is personality.
    It should be remembered that the industry sprang out of product selling – advice was a later add on. In general the best salesmen became managers, or left to start their own business, employing good salesmen who subsequently left to start their own business because being successful they obviously knew how to do it better. And of course, wanted the highest level of monetary reward. Even those Companies that had a longish history generally had a high turnover of staff. Indeed the business model was generally based on this assumption.
    So in a lot of cases companies were actually designed to fracture.
    Add in one other factor. The main function of the industry was to sell products – don’t sell, don’t earn. So practitioners needed to be aware of technicalities, in order to spin a good story, but did not need to be technically competent. Larger brokerages would hire someone technically competent to sit in the back office, but this was a high overhead, and generally not too welcome. So the overall ethos was a small, friendly company, looking after clients in a nice way.
    And that is the way in which most advisers have existed for many years, so there is a significant assumption that IFAs can only work in small groups.
    Whether this assumption will continue in to the future is a different question because the FSA have change a number of the ground rules. Technical competence is no longer a luxury but a necessity, and it is difficult to remain competent over a range of topics working in a small environment.
    The costs of transacting business are not growing, they are escalating, throwing a heavy burden on small firms. The lack of a long stop means that fewer people are likely to want to take on that problem alone. Keeping up to date with the regulations means two librarians for each consultant (I exaggerate, I think!).
    It may take a few years but I suspect that the way the industry works will change dramatically in the next 5 years, and so will the corporate structures. And for that reason clients will become more like customers, albeit long term ones, because the relationships that worked well in the past will not survive the cultural changes now occurring. The organisations that survive will have to embrace one further attribute not high on the FSAs acronym list – professionalism. And that alone will change the relationship between advisor and client. I suspect the days of the cottage industry are coming to a close based on current trends. Like accountants and solicitors there will be a range of sizes, though I cannot see too much benefit for mega firms, because there are few opportunities to make mega-bucks in a purely fee driven world.
    Only history can tell us if this will be an improvement or not; or merely a sad monument to a few anonymous people at Canary Wharf.
    My own guess is that it will be an improvement for clients at the top end (who could have looked after themselves anyway) because they can meet the charges that these changes imply and a disappointment for the mainstream market. The average man on the street only “deserves to receive advice” if he is willing to pay for it. He received advice in the past and complained when he found that it wasn’t actually free. Be careful what you wish for.

  8. Completely agree that it isn’t scaleable. The relationships break down, conflicts arise and quality suffers. As you know, I believe it can only be offered on a micro basis to achieve the highest of standards. Even the smaller IFA firms are made up of a handful of very competent guys with an army of followers. You would never get 20 very good IFA’s working under one firm’s roof.

  9. What exactly does ‘independent’ mean?
    If you are an IFA ,as many of the comments here allude to,then you are most likely to be part of a ‘mother ship’ or Group.
    True independence is no longer an option,due to legislative costs,overheads,staffing,qualifications etc
    The demise (ineffectiveness)of supportive bodies AIFA et al, illustrates well that advice is now a costly exercise for both adviser and customer, and that the cost of bad advice will ultimately force any truly independent to seek the cover of larger organizations.
    Scalable, definitely not in the current climate of uncertainty.
    Run for cover all you so called ‘Independents’ they are out to get you!!,

  10. very interesting questions from Martin, to which my answers are: not scalable; and not a bad outcome. A growing business can achieve economies in the ways you suggest in the article, but it’s the advice (being personal and, crucially, independent) that is not scalable. I personally think this is a strength of the UK market, and if you want to see what happens when a market is dominated by a few “advice” businesses that have achieved scale look to Europe and you’ll quickly cconclude the UK is a much better model for the consumer/client. I think most high quality Independent Advice businesses could only achieve scale profitably by diluting the independence, breadth and personalisation of their proposiiton. Ironically that probably involves destroying the value of what it is they were providing that put them in a position to aspire to scale.

  11. There is another fundamental difference between IFA businesses and firms of Solicitors and Accountants: the latter two create larger firms on the back of giving advice to corporates. That enables them to create an infrastructure, to charge substantial fees and to bring in trainees at a junior level who can generate some fees and therefore pay for themselves.

    However you won’t find big nationals that are effective and profitable in respect of advice given to smaller customers except where it is purely process-driven as with conveyancing and some types of litigation.

    Most partners in firms of solicitors and accountants are as individualistic as we are and make poor employees. Once anyone attempts to impose a corporate culture they are inclined to head for the exit and start up again, just as we would do.

    And there is an additional factor for IFAs, namely the supervision issue. Scalability implies increasing the layers of supervision, which involves much additional cost without any discernible benefit to clients.

  12. Another issue for large firms (and networks) is what I call the LCD (lowest common denominator) factor – i.e. that you have to have systems in place to govern a wide range of individuals, with different skill sets, experience and, frankly, ethics. These systems, if they aren’t tight enough, will expose the firm to unacceptable levels of risk, yet if they ARE tight enough, will prove very restrictive to anyone trying to be even slightly creative on behalf of their clients. For example, our network won’t allow me to advise on QROPS (highly suitable for many of my clients in Spain) because then they have to let others do so too and they don’t want the PI risk. Result – I refer QROPS cases to a directly authorised firm which ironically uses my network’s sister company for support services!

    I think that the post-RDR era may be difficult for some of the large firms as they seek to provide the tailored approach which the regulator expects whilst at the same time ‘keeping it tight’. The other big problem many will face is the realisation (too late) that they have paid far too much for some of the firms/client banks they’ve taken over.

    Maybe small is beautiful after all!

  13. In a December 2009 column in MM (IFA gorillas are a bad joke) I came to the same conclusion as Martin. However my reasons are different. They are a) that multi-office IFAs require more managers so you end up with higher costs and b) people going for size in the IFA business are usually trying to make money rather than provide a good service. I agree we will end up with some big restricted advice businesses, and their out-of-a-box solutions could be ok for a lot of people. Noone has yet convinced me that you can do full-service personalised financial planning on a big scale.

  14. Its been my experience that when an IFA practice is ‘scaled up’ it is simply so that the major shareholders of that business can make a sale….and of course the people at the top are generally not the ones giving the advice and hold the relationship with the client. A ’boutique’ style of IFA business offering a personalised yet specialised service is the way forward.

  15. Glen McKeown is right, both in his anlaysis and his conclusion.

    IFAs have, to date, been built aroundhigh powered individuals who have evolved from salesmen who then built their technical competence, and a support system, as they reduced their emphasis from hunting new client business and increasingly farmed their existing clients. However, most of these individuals expected to be paid as though they were still hunters, and continued to regard the clients as their property, not the businesses.

    RDR and the natural evolution of all business models, will lead to capital intensive business models where the client contracts with the company via retainer & management fees and becomes more aware that the advice process is based upon a number of contributors (paraplanners/admin/technical etc) pulled together under a corporate structure and ethos.

    Consequently the client will increasingly perceive him/herself to be a client of that organisation, not the individual adviser.

    This means that established firms with a client base will be able to rebalance their budgets, paying the lead “client relationship manager” a lower percentage of the income from each client (turnover for the portfolio of clients the adviser looks after, however it is earned), and spend the difference on support and technology.

    Conclusion: The small cottage industry, 1 to 10 man bands dependant on a few high powered individuals, will largely die-out over time (the stronger ones will survive as long as their leading personality remains active).

    Medium sized firms (say 10 to 50 staff) with an established client base (often acquired as smaller firms close) will thrive, as will some larger firms, although personally I believe that after, say, 50 and certainly 100 staff the economies of scale are lost as the need for increased supervision grows so as to maintain culture and standards.

    Businesses will be completely focused upon the service required to retain existing clients and their repeat fee income (topped up by one-off fees for additional work), with acquisition of new clients only required at replacement levels, say 5% to 15% a year, due to the exorbitant cost and disturbance to the business of focusing on attracting new clients.

    And who will be these clients? Well the 3 million Mass Affluent (£50K to £500K investible assets) as well as medium to high income households (£50K + pa joint gross household income and/or, £50K net assets inc their home) will be able to afford the minimum £500 (idealy £1000 to £3,000) a year for continuing personal advice, charged to products (as are the current 0.5% pa trail/renewal fees) at, say, 1% pa of invested value/ total/net assets/household income.

    Smaller clients can receive a basic initial and continuing service at “arms- length” with occasional “free” personal evaluations over the phone/internet cost effectively as a means of retaining the income they provide, but more valuably as a pool from which some clients will grow into mainstream clients in the future.

  16. Of course it is scalable. The problem is that the people who have tried to scale it have, by and large, made a hash of it.

    The bottom line is that to scale up you have to have a set of business processes that add up to a service that can be delivered consistently over time, with a client base that believes that the service is worth it.


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