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Special effects

Introduced business from neighbouring professions has long been part of IFA practice but increasingly it is IFAs referring business to each other, seeking out fellow IFAs with expertise in a particular area.

In discussions about the future direction of IFA businesses, two comparisons are often made. In terms of professionalisation, the analogy is made with accountants and lawyers. When the conversation changes to specialisation, the comparison is with GPs and specialist consultants.

A few years ago, most IFAs were in general practice, seeking to cover the full range of their clients&#39 financial needs. As far as the regulator is concerned, IFAs continue to have to be generalists. However, the increasingly onerous compliance burden has led many – by accident or design – to move into specialisation.

DBS business development manager Chris Haines says: “To promise to be all things to all people may not be the best way to go and ignorance is no defence when it comes to compliance.”

Opinion is divided as to whether IFAs will become predominantly specialists or a two-tier system will emerge. But as practices become more foc-used and play to their stren-gths, the danger is that they will lose their clients if they cannot satisfy their requirements beyond that particular specialisation. If the IFA does not refer the client himself, he risks the client establishing a relationship with another adviser off their own back.

As the IFA sector is still relatively young, the development of specialists is seen by some as a logical progression and sign of maturity. Escalating regulatory scrutiny means other areas previously considered straightforward will soon make requirement over and above what many IFAs will find reasonable.

As a consequence, many believe there will be more and more areas of the market that certain IFAs will choose to vacate. For Haines, mortgages are a case in point. Whereas before, they were a simple bread and butter product, the new regulatory regime is likely to lead many more IFAs to avoid getting involved in this part of the market.

London & Country mortgage specialist David Hollingworth believes the amount of documentation that will be required to sell a mortgage together with the need to take further exams will mean some IFAs, the smaller ones in particular, will simply not bother. While at the moment his firm has no link-ups with IFAs, this is not something he rules out in the future.

Other areas are more clearly the preserve of specialists on account of their inherent complexity, as in the case of income drawdown, or need for additional qualifications, as in the case of pension transfers. The Annuity Bureau is one of the best known niche IFAs specialising in annuities and income drawdown.

Marketing director Dave Marlow says it has a number of introducer agreements in place. Unlike some agreements between network members, the agreements the bureau has in place are not reciprocal. If a client comes direct to them and requires advice on other areas, they are referred to IFA Promotion. Marlow believes the main attraction of the referrals is that his firm then assumes the compliance risk.

According to Haines, part of the network concept is the idea of actually networking. Members develop contacts at regional meetings and discover each other&#39s specialisations, which can lead to reciprocal arrangements.

Baronworth Investment Services director Colin Jackson&#39s endowment trawling service used by IFAs and building societies has grown over the last 10 years mainly by word of mouth and press coverage. For him, the success is based on confidence.

Jackson says: “Trust in the IFA you are going to do business with is the most important thing. First, you have to be sure you have trust in their capabilities and that they will undertake the business properly. Second, you need to be sure you are not going to lose the client through cross-selling. Third, you want to know that you are going to be paid.”

Jackson undertakes not to add the referred client to his database and Marlow says his practice copies the referring IFA in on all correspondence. Both are keen to stress that they have a written and signed agreement in place reassuring the introducer that they will not cross-sell. While both offer a straightforward 50/50 commission split, Haines says among members of his network, a commission split of around 70/30 or even 80/20 is more usual to reflect the compliance risk that is taken on.

Beyond referring clients to other specialist IFAs, brokers could find themselves going to other providers as providers. Already, some IFAs are developing bespoke products which other advisers may want to buy. While this is already taking place to a limited extent, the IFA/provider is still somewhere in the future.

John stones


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