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No major economies of scale in IFA industry

All the surveys I have ever seen about IFAs have one thing in common, they tell us that what clients value is face-to-face contact and personal advice. After the retail distribution review, presumably this is what any sensible adviser will focus on.

But I can already see some strategies being implemented that look like subtracting rather than adding value to the advice proposition.

Advisers operating on their own or in very small firms have always had the problem that they spend too much time on administration at the expense of meeting and servicing clients.

The consolidators’ answer to that is scale – scores or even hundreds of advisers justify bigger and better administration systems that release advisers to spend more time with clients.

The trouble is that this only works through standardised solutions, such as discretionary fund management, model portfolios or out of-the-box inheritance tax solutions.

The harder you look, the more it seems like a restricted advice proposition and although that may have a place in the market, it is clear that the only people pushing it are empire-builders who see commercial advantage in it, not professionals dedicated to giving their clients a top-notch service.

I have always argued that in the professional IFA industry there are no major economies of scale. In fact, there are diseconomies of scale.

Bigger firms struggle to integrate the various systems they have inherited from their component firms and fixing the resulting problems always seems to absorb more time and money than was intended. Creating common standards for administrators with years of having done it their way is not a recipe for happy families. As for creating common standards for advice, this is even harder.

Before the RDR, large adviser firms could add value, at least in a narrow sense. Large and ugly adviser bosses beat up large and ugly life company bosses to get more commission. That is all the value anyone ever added to an old-style national IFA or network. For the record, I do not include the execution-only operators such as Hargreaves Lansdown and Bestinvest, who certainly have added value – but they are not IFAs in the RDR meaning of the term).

Who will the bosses of big fee-based adviser firms beat up after the RDR? Their own advisers, I suggest, will be the ones who are told to become square pegs in square holes or find better holes to go to, though the discussions could be somewhat less polite.

Better administration can release more time for advisers to see clients. But this is perfectly possible for firms of half a dozen advisers. You can buy a solution for almost everything off the shelf at reasonable cost and have more flexibility than a large adviser with a bespoke administration system.

My betting is that after the RDR there will be even more available to IFAs. Pension-splitting and equity release, for example, are areas where even a medium-sized IFA firm may struggle to justify a full-time specialist, so we will probably end up with specialist firms that IFAs buy in to handle such cases.

As for fee-based IFA firms adding value by employing a tier of highly paid man-agers who do not advise clients, there are plenty of reasons to be sceptical.

Chris Gilchrist is director of Churchill Investments and editor of The IRS Report


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevensd 18th July 2011 at 10:18 am

    All of which seems to be to be a rather roundabout way of saying that the cost of staying in business to provide the face to face advice that consumers clearly want is going to keep going up and up. Clients will either have to accept that and pay more or, particularly in these straitened times, more and more of them will decide that they aren’t prepared to pay for it. Some will try to do it themselves, very probably with uncertain results, quite possibly on the strength of some barrack room ‘expert’ down at the pub or on the golf course.

    Are these the ‘better consumer outcomes’ that the FSA is forever harping on about? If so, it clearly shows a lack of understanding of the way things work out hee in the real world.

  2. steven Farrall 18th July 2011 at 4:16 pm

    Exactly. I came to that conclusion years ago.

    Essentially what you are saying is that the costly bit of financial servises is the face to face advisory bits and that bit is the bit the clients value most. Again, I think exactly the same.

    Cost savings have therefore to come from elsewhere in the chain, and this has been happening despite the FSA worst efforts.

    You can build bigger IFA businesses, but necessarily national ones. I have a plan for this, which does benefit from economies of scale but which I am not going to share with you.

  3. I agreed with the bulk of what Chris Gilchrist has stated.

    IFA networks and the ‘Empire Builders’ do look to shoehorn you into something you may not be. Just look at the Towry/Raymond James debacle that has ended up in Court and this is a classic example of it.

    Apart from increasing advisor qualifications I think that the RDR is going to do little to improve consumer outcomes.

  4. Chris overlooks one obvious opportunity that is likely to gather momentum post RDR – IFA’s coming together in an expense sharing arrangement. Symbiotic IFA’s can provide the range of expertise under one roof , share compliance and administration costs , have a marketing department ,holiday cover and the ability to refer clients to a trusted expert in areas outside their expertise. This is not unlike how a barristers’ chambers work. Could this be what Steven Farrall was thinking of? Isn’t it time IFA’s statred talking to each other to explore this profit motivated opportunity?

  5. I agree with Chirs too. I think a 3 to 10 man IFA firm can achieve economies of scale and if the advisers and staff are like minded give good Independant advice. Any larger than that and you end up with square pegs in round holes and that is painfull foir one if not both parties.

  6. A good article, that, I believe, goes to the heart of the problem with RDR.
    Personal Advice is, in essence, a cottage industry. It is also an odd industry, in that it lies between a range of specialisations such as lawyers, accountants, Actuaries, tax specialists etc, and tries to act as the GP, knowing enough to provide advice, and when necessary to point clients in the direction of deeper advice, but not enough to be a true specialist themselves. That has always been the real strength of the industry. Based on that I would even venture that the FSA fetish for higher qualification standards could be counter productive, in that, when people reach that higher standard, they are likely to move into the more specialist areas – that is why one increases one’s qualifications.
    So the adviser industry is likely to either remain as a cottage industry, or die out. Larger organisation tend towards a culture of targets rather than client satisfaction. It is difficult to achieve a healthy balance.
    The fact that it has not in the past ever been able to create sustainable economies of scale means that the costs of RDR make a sustainable “cottage industry” process more difficult to achieve. Some will be good enough to do so, but many will not. Being a good adviser and a good businessman are not necessarily synonymous qualities.
    If there is a significant contraction in the numbers of advisers then providers of all products will, at some time, enter a re-examination of the viability of advisers as a sales medium. That is likely to happen after RDR actually strikes home, but most providers still seem more intent on making money now, than looking at longer term implications. RDR may actually be a greater culture shock for them than they realise.
    Clients will see Advisers as a expensive method of obtaining advice, and as Julian Stevens observes, try to do it themselves. At that point they will find that the market is actually not very well structured for the do-it-yourselfer.
    Duncan Jones raises a valid question about the direction of IFAs. I suspect that the answer lies in the history and psychology of advisers. Those advisers who have stood the test of time tend to be very orientated to the service they provide for their clients. Entrusting those clients to external experts is, at the present time, a difficult decision. If it wasn’t it would already be more widespread.
    Better consumer outcomes is a wonderful phrase, but is may prove to be very illusory.
    However, the FSA have been bright enough to know this. What criteria have the FSA ever published that would allow people in say 5 years time to demonstrate that better outcomes are being achieved.

  7. I suspect that it is a combination of factors that will determine the scale that might be profitably achieved whilst still delivering what the consumer really, really wants.

    The fledgling Financial Conduct Authority is already calling for financial services firms to have as part of their DNA a set of consumer centric values. So perhaps an attribute of a scaleable intermediary firm is leadership (not just leadership to large revenues but leadership in delivering service to clients)

    Teamwork (as suggested by Duncan Jones in the very sensible and interesting “Chambers” approach) Economies of scale can be achieved where individuals specialise and concentrate upon what they do best.

    And efficiency not just through teamwork but through systems and processes (and yes use of technology) that everyone adheres to.

    I think the optimal scale might be higher than the 3-10 suggested by Phil Castle but I bet it is closer to his figure than say 200- 300

  8. Taking a step back, it is probably true of most industries that artisans and hand-made products ultimately give way to mass-produced machine made products and services. How many people do you know who still buy hand made shoes or hand (mouth?) blown glass. Yes, some people still do, but they are in the minority. The rest of consumers have moved on. Are consumers worse of as a result of this? Of course not – more people are able to afford more shoes and glassware at more affordable prices and of perfectly acceptable quality. It was only the cobblers and glass blowers that failed to move with the times who suffered.

    So why should the same not happen to the financial services industry? A few will always want and be able to afford the personal face-to-face advice only a highly skilled IFA can offer. The rest will be more than happy with a more mass market service. The few(er) IFAs that can remain in this space are lucky. The rest of the industry needs to be looking for the technology, innovation and required to conceive and deliver products and services in a cost-effective way to the masses.

  9. This has been one of the best articles I’ve read for a long time and gets to the heart of the issue within financial services at present.

    To Chris C Fox

    I understand your comment and find it quite concerning, as what you are saying is that the majority of individuals in the UK will simple not have access to face-to-face advice, as they will not be able to afford it. Maybe it’s about time that we consider a financial services advice aid bill, just like the legal aid system, as I would strongly disagree that advice should only be for the rich.

    To Glen McKeown

    I just wanted to say that your response was a well-balanced and constructive and like many in financial services present, I am wondering what the future will hold, as we all know that we spend far too much time doing administration and not enough time seen clients or indeed marketing. Like every business the problem that we all have is access to capital to invest in one’s business particularly when the future is so unsure.

    I have over 17 years experience in financial services and would count myself, as one of the new breed of advisers with a positive outlook for the future. The only thing I would want from the FSA is greater protection of our trade and to stop others operating within it without the relevant authorisation or registration. I mainly talking of the solicitors and accountants that give financial services advice without being registered with the financial services authority and therefore paying no fees, this is clearly unfair. How many solicitor practice have wealth management services with no FSA registration under the EPF for example.

    If we are to become more professional profession and we need to put pressure on the FSA to check registrations of firms and fine Accountant and Solicitor practices that are found to be operating without the relevant registrations.

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