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Never been a better time to be an IFA

When I speak to our partner firms and the wider adviser community these days, I am getting a real sense from just about all of them that this is a really great time to be an IFA. Or rather that this is a great time to be a “high quality” IFA.

There are a number of things driving this positive feeling at the top end of the adviser market but the key one for me is the realisation that this much-talked about power shift from providers to advisers is not only happening but is happening at pace.

This is great news for the adviser market. It means the foundations are being set for a golden period for truly independent advisers, where they will not only get credit for the great work they do but will also be able to achieve the sorts of business valuation once only reserved for product providers.

RDR is helping to move things along, there is no question about that. Importantly, it is also helping rid the sector of many of the weaker IFA firms, which I think is a good thing. But to be honest, many of the more forward-thinking adviser firms I work with were on this path well before anyone had ever heard of the RDR. They, like me, had a sense of where things needed to head and were insightful enough to start the journey themselves.

Technology, particularly platforms, has been instrumental in helping many adviser firms. The importance of platforms is now well recognised and an IFA’s choice as to which one, or ones, they use is arguably one of the most important business decisions they will ever make. The right platform can not only drive up efficiency and keep down costs but as Hargreaves Lansdown and Cavanagh have demonstrated in the wealth management space, it can form the centrepiece of a client-focused and extremely profitable business that has real value.

Key to creating that value is advisers getting paid what they are worth. On a typical TER of 2 per cent, IFAs historically only see around 0.5 per cent of this Providers and fund managers get the remaining 1.5 per cent. I believe advisers should be getting around 1 per cent and it is something we are working hard with our memb-ers to achieve. We are already there with most of them.

While all this is going on, there are also opportunities for IFAs in the as yet untapped corporate space. Again technology, in the form of platforms, will play a crucial role.

The changes we are seeing in the industry are ones many of us have been campaigning for for some time or at very least were expecting. Has there ever been a better time to be a high-quality IFA? I am thinking not.

Paul Hogarth is founder of Paradigm Partners

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Comments

There are 24 comments at the moment, we would love to hear your opinion too.

  1. Phil McGovern 20th May 2011 at 9:09 am

    Totally agree what Paul is saying. At the top end it is incredibly busy and small IFAs are banging on our door to join as we are in RDR world already

  2. So, according to Mr Hogarth, a “high quality” IFA is an IFA that charges 1% rather than 0.5%

    Sounds to me like the difference between a prostitute and a high-class escort. One charges more than the other and wears fancier clothes.

  3. It all depends what value the client gets, Bill. Some IFAs are worth a great deal more than 1% per annum and some aren’t worth anything at all.

    A good IFA will do much more to improve the financial wellbeing of his clients than any fund manager or product provider ever will so it’s only right that he/she should get a higher proportion of the total charges that a client pays.

    As Paul says, advisers should be paid what they are worth. What on earth is wrong with that?

  4. He should get a job withthe FSA, he has all the necessary qualifications. Self opinionated with a complete lack of focus and not a clue as to the what is going on in the bulk of the industry. I think we have found your succesor Hector!

  5. Paul Standerwick 20th May 2011 at 10:35 am

    A very blinkered view of one particular way of doing advisory business.
    Not every client wants or needs a wrap/platform, and not every client wants the inflexibility of seeing half of their first years £100pm (all some can afford) into a pension disappear.
    1% trail seems extortionate for ongoing management to me, especially when dealing with funds like invesco perpetual income; I quote Neil Woodford “the fund is not designed to do a job over one year, what happens over that period in terms of returns is irrelevant” – yet you want to be paid 1% to sit and watch???
    Different clients have different needs and need different solutions, RDR is short-sighted and over restrictive.

  6. Paul Hogarth is right in the round.

    However have the IFAs really shaken off the provider shackles?

    AIFA receives around £400k from providers who are its “associate members” and the majority of its larger members are owned by providers, who not doubt have an opinion on what the networks are saying around the AIFA board table.

    If IFAs want to be free they need to own their mouthpiece

  7. “High Quality” is going to refer to “High net worth clients” post RDR and has nothing to do with quality just affordability.
    For the majority of general practice IFA’s who do not work in High quality “Bentley” market place but in the BMW/Audi/Mondeo market place “high quality” advice may not be affordable to these clients which will equal NO advice post RDR for the majority.

  8. Green Eyed Monster 20th May 2011 at 11:14 am

    The 1% proposed by Paul is not just to look at the funds, its for the management of the client’s affairs, as Steve has mentioned above. Taking it from the product is just the channel of payment to suit the client. He could instead pay it from his bank account by SO.

  9. What a lot of rubbish. The industry will shrink. No longer will the public get sound advice that they can afford. The cost of regulation means that we need to charge higher fees to meet overheads and yet the regulator is going to police the level of charges which will stop the free market.

    People are and will continue to make lots of money from all this but it won’t be the IFA.

  10. Most of our clients are not HNW they are average Joe but still require financial advice. They are, have been and would continue to be happy to pay for the service I provide from “commission” payments. As it stands, when RDR comes along many of my clients will end up sitting if front of target driven Bank advisers because despite the sound job I do for them the thought of them having to write me a cheque for setting up a £100 per month pension will just not sit right with them. Does this mean I am not a “high quality IFA” ?

  11. Paul Standerwick 20th May 2011 at 1:29 pm

    Green Eyed Monster | 20 May 2011 11:14 am

    the 1% is for

    “management of the client’s affairs” – sound a bit wishy washy to anyone???

    Absolute b*ll*x, if the charge is taken from a specific product, it should be for the management of that product, not to supplement other work – is he suggesting doing his clients washing up??

    Im pretty sure even the incompetent regulators will stipulate fees taken from products must be associated with services relating to that product!

    I already work with wraps and platforms, it is my preferred business, however as others have mentioned, this is only one part of the market (for those with bigger portfolios in the main) and why should we be prevented from doing other profitable commission based work. if the client gets a good deal and knows what they are paying, what we receive is none of their business!

  12. Dominic Thomas 22nd May 2011 at 11:25 am

    It seems a little silly to draw market-wide conclusions based on 30-50 clients each with over £750k of invested assets. As ever, the truth is rather more complex and precisely how 98% of the market get good advice is rather more important. Sanctimonious HNW advisers miss the point and it isn’t good enough to simply say charge a fee on a smaller scale, the reality is that many of the fundamental aspects of financial planning take a similar form whether the client has £50,000 or £5m.

    If completely honest with themselves, a HNW adviser should be able to charge for the advice and service without ever setting up a single product from which they recieve payment and the client merely provides them with a login to their online portfolio to review for a fee…now I’d challenge you to that and then tell us all how en masse.

    I don’t really understand why so many people seem to think that there is only one way to be an adviser. Surely the point of independence is choice, yet the thrust of RDR seems to ignore this pinciple in every regard other than the ability to consider products.

  13. It is a well researched fact that people mainly acquire information to support their own established beliefs and attitudes, and this comes across strongly in what Paul Hogarth is reported to have said. To paraphrase “I am on the right track and look at all the others that believe the same thing, so this is the way we should all go”.
    It may well be a good time to be a high quality IFA, but what proof is there that it is a good time to be the client of a high quality IFA? There is actually remarkably little evidence that high fees and high qualifications are positively correlated to high quality advice, short, medium or long term (curiously the FSAs own pseudo-research makes this point). It is also true that there is little evidence of the opposite, so, in true salesman style, state your own point of view with absolute authority and people will treat the statement as fact. (There is documented research to support that conjecture.)
    Yet despite this emphasis on professional quality he is still appears to be talking commission levels, i.e. 1% fees, that the FSA implicitly believes points in the direction poor advice. So time/cost is not part of Paradigms thinking. A key element appears to be that advisers are “paid what they are worth”, but let’s not put that to the test with a quantified charge, rather hide it in a percentage charge. Odd thinking? Not really. If banks can get away with multi-million pound fees on projects (and the FSA have raised no objection there) why not continue using the process ourselves, but use better language. We’ll just ignore this part of RDR, since it doesn’t suit us; and how can the FSA impose it on IFAs if they can’t impose in on Banks. Do I detect a tiny bit of double-think here?
    And why 1%. In the context that Mr Hogarth places the analysis it seems like a jealous reaction to the amount received by other partners in the transaction. Is this a serious way to measure one’s worth – I am worth £X because you are getting £Y.
    One may also question the concept of charging “what they are worth”. I would suggest that this is occurs more in the statement than the fact in most walks of life. Are bankers and investment managers really paid what they are worth, or what they can get away with? Are accountants and solicitors really worth what they invoice, or does the invoice reflect what they think they can get.?
    If advisers, across the board, started to charge what they were worth, two questions would rise. Firstly, would clients readily pay and secondly, how does one quantify the concept of worth other than by what one can bill and get away with. How many times will the cost of chasing payment of the bill exceed the level of the bill? So it becomes necessary charge for that non-payment risk level, just as Credit Card providers do. Whatever faults providers have, failing to pay commission is not one of them (though reconciling the statements may raise a problem or two).
    RDR is filled with a lot of vague concept words and very little substance. The core philosophy may sit well with advisers and with consumers, but does the detailed implementation have any genuine underpin. Paul Hogarth’s words tend to suggest that the answer to that question is in the negative, since again we have lots of sentiment but little substance.
    What is a weaker IFA firm? One that is less profitable than Paradigm Partners? One that deals mainly with sub-HNW clients? One that generates lots of complaints – like Barclays Bank? It’s rather an insulting and content free phrase that adds nothing to an intelligent debate, other than resentment. It is as though Paul Hogarth is looking down his nose at any other business option than his own. I find this is a frequent aspect of comment in the financial industry. Is it compensating for an inferiority complex? Why can’t other business strategies have equal validity?
    “The right platform”! I have a lot of respect for Hargreaves Lansdowne in that they have created a profitable and respected business proposition, but it is taking matters a bit far to call it “the right platform”. It is a successful platform, though personally I have never really considered it to be an advisory platform. So precisely what is “right” about it? That it makes money? That it adds value to the client position? If this is so then it would be interesting to see the research that underpins such a judgement. Or could it be that, like so many other successful businesses, it was in the right position at the right time and grew mainly on that circumstance? Good luck to HL, but do be cautious about using them as a model without understanding why it is they are were they are.
    And how useful is technology? It can certainly be a boon to the adviser when used in an intelligent and disciplined manner. But it can also be a source of confusion – a barrage of conflicting ideas; a daily flood of emails; a major source of distraction. I have no doubt that technology is useful, but then so is atomic power. One needs to know how to utilise it.
    How is technology for clients? From some recent work done I would suggest the answer is that it is very confusing and off putting. So much so, that for a large part of financial system it is not a viable alternative to using advisors because there is insufficient access to clear and quality information.
    Try to get an annuity or whole of life quotation on-line as a non-adviser. You will find yourself pointed at an adviser at every turn. I’m sure many advisers will say this is as it should be, but the fact is that it is denying the consumer adequate avenues of both choice and information.
    And there is little evidence that computerisation is driving down costs overall. The use of Platforms has put pressure on investment houses to increase the annual management fee. Many insurance providers are spending fortunes in integrating historic administrative platforms. Advisers spend fortunes in administrative time trying to cope with the maladministration of providers, and providing copious levels of information to the Regulator that appear to vanish into a black hole. Remember than “can” does not automatically equate to “does”; indeed I suspect that one may be the antithesis on the other when it comes to computing.
    What if, as a consumer, you do not believe that professional advice is worth a 1% fee to you. Today’s platforms will not help. And I suspect that tomorrows platforms will also be of little value because everyone is running scared of the regulatory constraints. Read some of the caveats aimed at the general public and you may be embarrassed at the self-protective rather than informative element contained in them.
    So yes, it probably is good to be a high quality adviser because the market is being driven in that direction. Is it good for the general consumer market? Probably not.
    I guess it is an extremely good time to be a partner in Pricewaterhousecoopers or Linklaters, but those are not the whole of the accountancy or legal markets. It could be just as good being Joe Bloggs, Accountant/Solicitor looking at the lowest end of the market. They are still covered by the same rules and requirements as their bigger brethren and, I suspect, are more appreciated by their clientele. But at least there is a range of choice for the consumer of those services.
    I do not believe I am alone in believing that the changes being brought about by RDR will not lead to a similar wide choice in the financial market. Rather the changes will go in the direction implicit in Paul Hogarth’s words, that is, to higher fees for a higher quality of client. Actually this has been the trend for many years, which is why the banks have had a clear run at the less sophisticated.
    If Mr Hogarth’s statement indicates that is the way Paradigm want to go then that is their choice, and the best of luck to them. It should not be made to sound as though it is the only rational choice for the market, especially when it is so weakly argued.
    As Alan Lakey said in January 2011 “…how many of the other FSA assumptions are built on hills of sand?”. We can’t respond with strength if our own ideas are as flimsily based.
    The debate, with accompanying analysis, should be about whether RDR should lead to a better overall market or merely a richer and more elitist sector with a major collapse of financial advise in the rest of the market. To be fair that is what the tenor of comment on most web sites has been about. Debate is when there is comment and response. Those who are pro-RDR, like the FSA and, apparently, Paul Hogarth ignore alternative comment entirely, and sail on serenely – presumably until the next ship wreck. There is now a strong belief that, in practice, RDR is about the middle class looking after the rich, and this article re-enforces that perception.
    It is curious of course that this potential outcome to RDR had its origins in the actions of a man who, outwardly, professed a close alliance with the working man – Gordon Brown. As they say – be careful what you wish for.
    Of course that statement does not apply to the FSA because whatever the outcome it will cost them nothing.

  14. Let’s have a follow-up piece – ‘never been a worse time to be a financial services consumer’.

  15. Increasingley Frustrated Adviser 23rd May 2011 at 9:40 am

    @ Martin. Let me get you a bigger hammer, because you are hitting the nail right on the head. Consumers will suffer, especially the “average joe”, IFAs will no longer be able to justify small premium business and consumers will be forced in front of bancassurer “advisers”. RDR is driven and led by the banks. they will be the only ones to benefit.

  16. In some ways I agree with Paul, the shift is towards distributors of services and products rather than manufacturers.

    On the 1% issue I am not sure what a 1% advisor does better than a 0.5% advisor or a 0.75% advisor.

    I do wish to be enlightened.

    As for better times I think there are just less worse times. The ‘mass affluent’ and affluent can really benefit from financial planning, finding these clients for most advisors is not and has never been simple.

  17. Really good comments from Glen McK, but also agree with anon 23 May 2011 11:48 am

  18. Agree with Glen Mck, never a better time if you are charging a %age fee – wht is the point of RDR if HNW clients are sources of wealth for advisers but lower value cases are not, Surely if it cost say £300 to arrange an investment, then it is irrelevant of the size of investment and the client should agree that it will cost a further say £300 pa to review the investment or £0 if there is no review, each transaction relates to service – If I go to the solicitor and get them to do conveyencing for a house purchase, I don’t want t pay him ongoing service charges based on the value of my property which after all he directly cannot influence, if my property doubles in value after ten years I wouldn’t expect to pay twice as much for the same thing. If I go to the dentist I expect him to examine my teeth, suggest treatment if necessary and I pay for this, again I don’t expect to pay him afterwards for treatment that he has given me on one occiasion only. My view is that there should be a set of either standard commission rates maximums or fees that can be charged and a “legal aid” type arrangment or fund set up so that the poorer members of society can have access to professional advice – the “trail/fee” is an obvoiuos way of doing pretty much the same thing that we have done always but is more complicated and expensive for the consumer in the long run – no wonder the article says theres no better time to be an ifa.

  19. Very true and I agree.

    Oh, for the doubters of Paul Hogarth – a chap who created Bankhall, made a big profit and launched Paradigm – not got a clue about the industry? Spoken like the usual no hopers who will (hopefully) become extinct after RDR.

  20. Clive R Steggel 24th May 2011 at 10:26 am

    If you have a good back office system that you can get proper management information from and full client and contract/policy information and record keeping and valuations then then you do not need a platform. You will save your clients in cost. What is needed is full conectability between back office systems and the providers then you can say you are truely independant. Providers need to do a lot more with their older contracts to be able to view that infomation electronically

  21. Exasperated Me 24th May 2011 at 2:21 pm

    Who once described IFAs are being “like children”?

  22. No idea Exasperated Me. But you’d have a truly hard time to prove them wrong…

    A bit of a generalisation maybe, but anyone from outside of ‘the industry’ spending five minutes reading the comments on this site would not be disagreeing in a hurry.

  23. The whole premise of RDR charging clients is great if you have a client base that can afford to consider this option. As a small but long standing IFA business on a small Scottish Island, we have managed our client money successfully for over a decade through a commission based system. The average salary is around £20K and average pension premium less than £100 per month. Our clients have been questioned over the past year about paying fees and only two out of almost 1000 have stated they would be prepared to take this up.
    So far as trail commission is concerned, we have only taken 0.5% fund based since setting the business up 11 years ago and have established an income that supports the business and ongoing client servicing. We see no need to either increase this level or to take any initial commission to maintain our service levels.

    The banks will be the winners from 2013.

  24. I would counsel against the inferance of ‘we are worth 1%’ There is a simple danger that the services of the platform; the product provider; the fund manager; and then the adviser all add up too much, and mean that the overall charge on a client fund could mean that they would just be better off with a lower risk investment, with no advice.

    Advisers need to continue the good work of building their propositions to demonstrate the real value of services, and support for the client. We all know that the RDR is good and bad, and those that drove it knew not where things would end up.

    I would always counsel an individual to think carefully when selecting their adviser and pay particualr attention to the renewal commission being taken to ensure that they are going to receive fair services in return. A 1% charge should cause the prospective client to ask more questions and ensure they they are getting value for money in return. 1% is too much for just having the priveledge of being a client. An annual charge of this nature needs to be met with an annual service too.

    For the adviser a 1% charge does not mean a profit either. Think through your services & cost them out so the client can see. As an advocate of UK IFA I can only ask firms to be on the front foot to explain and price their services.

    You will only be valued all the more in return.

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