As the IFA sector awaits the final paper on depolarisation, we would do well to look at our own industry and the temptations that lie within it. As we try to move our own business away from the traditional model it’s clear that some of the alternatives are at best a short-term fix.
The new panacea is, of course, wrap products. But take a look at the published accounts of some of the platforms and you will soon wonder why we should work with firms that do not know how to run their business profitably. The payback on investment is, in many cases, needing an increase in profit, if there is any, by a factor of more than 100.
Perhaps this is all a throwback to the flawed concept of embedded value. When some companies are offering increases in commission of 50% you have to wonder just who will benefit from this philanthropy. Is it just the recipient of the commission who gains or are some executives in life companies more interested in raising turnover at the expense of profit? Just as embedded value is a farce so are commission auctions where no real savings are achieved.
If advisers are to survive and prosper as opposed to surviving for another 12 months, we need to recognise that the menu focuses on remuneration and so will many conversations. We must take the initiative and explain exactly what we do and where we add value. If all you really do is buy investments or sell life cover then I fail to see how you can justify current commissions when an internet-based alternative could do the job for a fraction of those amounts. The transaction model is bust. Fail to recognise this and I expect you will be forced to multi-tie or to hang up your boots.
The current market cannot continue, the removal of support for the Investors Compensation Scheme is evidence of that. Insurers are becoming more commercial, unless some in power are near retirement. When I interviewed a chief executive some time ago, I asked him where his company would be in five years. His response was that he would not be there. That sums up the reasons that I believe that some companies will throw money around without regard to long-term profitability.
We are in large part to blame, it has to be said, hooked as we are on commission to the point where it clouds our judgement and damages our long-term wealth and the health of our business model.
We need a cold turkey approach to avoid the quick fix of a slug of indemnity. Let’s all head for rehab or be honest like Bradford & Bingley and do a deal with access to a funds platform and risk products with one insurer. Maybe this is a result of B&B’s decision to sell its IFA businesses; it may also have recognised that independence and commission can be a corrosive mix.