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Niche or not?

Does the survival of IFAs lie in being big or being focused on a niche market?

According to NU Life chief executive Philip Scott, speaking at the recent Aifa conference, this is where the future for IFAs lies and many IFAs agree with him.

The industry has been changing rapidly and IFAs realise they will have to adapt.

But the prospect of having to focus on a niche market or join a national firm or network is not necessarily as bleak as it may seem initially.

Operating in a niche market does not automatically mean specialising on one particular product. IFAs&#39 traditional market has been niche – high-net-worth individuals. They have been sidetracked into offering services to all sectors of society and this has not always turned out to be profitable.

IFAs need to be more selective about the clients they take on. They will have to turn away business that is not profitable enough. They also need to be selective about products.

The introduction of fees is another way a small adviser can adjust their strategy.

Consumers often expect advice to be “free&#39, at least in so far as they do not pay anything directly from their own pockets. But advisers may advise on a commission basis only to see potential clients buy direct or from a discount broker.

Many IFAs feel stakeholder will not generate enough income to make it worth their while promoting it and it looks highly likely that other products will follow stakeholder&#39s low-charging structure. IFAs will now have to place a premium on their time.

The cost of time demands are increasing. A general IFA covering products across the board of personal finance need to know about many areas. This is not just basic product knowledge but there is also a vast amount of compliance issues that an IFA has to know inside out. An adviser must also stay on top of any changesto these issues. It is inevitable that a point will come where they can no longer cope with the demands.

The cost of the day-to-day running of a business is increasing but this is nothing compared with the financial pressure regulation demands are putting on IFA businesses.

Additionally, the pension review and other industry scandals are pushing up the cost of professional indemnity and altogether these rising costs are putting small firms out of business.

IFAs need to offer a service that supplies something different. People can now access information on any product or company they are interested in through the internet and are coming to IFAs with more background knowledge than before. IFAs need to invest in technology. Some clients now want to use an IFA as a facilitator to share ideas with.

Another option is to be part of a national firm or network. Life offices are increasingly looking for volume business and this will only come from large companies and networks.

Small IFAs who find it expensive to operate on their own or struggle to keep up with back-office demands have found joining bigger firms takes a lot of these problems out of their hands, leaving them to concentrate on giving advice.

The average age of an IFA is 54 and advisers looking to sell their businesses are selling them to bigger firms.

National IFA RJ Temple communications manager Liz Walkington says part of its criteria for buying an IFA business is that the people are going to stay. They feel the relationship an IFA has with their client is crucial to keeping clients on board.

Although many IFAs agree with Scott&#39s comments, not all of them welcome the intervention. Some IFAs believe it is in the providers&#39 interests to work with big IFAs as it makes less work for them. Small firms can be more labour-intensive for providers.

Middlesex IFA Norwest Consultants principal Harry Katz says Scott is hypocritical in trying to tell IFAs how to run their business. He says: “This comes from a man whose company prostituted themselves by getting rid of their firm in a ridiculous deal. Why should we take advice from him?”

But not all IFAs are quiteso harsh. Millbrae Financial Services managing director Carl Melvin says: “I think Scott is spot on.”

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