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‘Switch to fees in just two years’

Advisers can move from a reliance on initial commission to a recurring income-based business model in as little as two years, says Paradigm chief executive Paul Hogarth.

He says: “You cannot take everyone to a recurring revenue overnight but I think it could happen in the next couple of years. There is massive consolidation in the marketplace and IFAs are now willing to start working together to meet the same objectives.”

Hogarth says the valuation that Hargreaves Lansdown achieved when it floated is in part responsible for the increased appetite to move towards recurring revenue. He says advisers now know their businesses can be worth up to eight times their annual income when they sell .

He says: “I think the Hargreaves Lansdown model has really woken people up to the value that can be achieved within a business. They have no reliance on life companies. People are starting to say, why would we pay an insurance company, we get better deals by going direct to the fund managers because we have the relationship with the client.”

Support service provider Paradigm now has 70 partner firms representing 340 registered individuals.

Hogarth says Paradigm will have up to 90 firms signed up by Christmas and this could grow to 250 within two years.

He says: “I think we will be the most successful launch of an IFA business ever.”

The business also comprises 500 mortgage advisers but Hogarth is keen to keep the two parts of the business separate.

He says: “One of the failings of many support companies is putting mortgage and investment advisers in the same room.”

Paradigm says advisers are attracted to its partnership model which offers a share of equity. It encourages advisers to white-label Nucleus’s wrap, but Hogarth says Paradigm is not compromised by the FSA’s concerns over equity-based incentives for IFAs to use wraps.

He says: “We are not a wrap provider. We are a conduit between the manufacturers and the IFAs. The FSA has concerns over whether conflicts of interest are managed by incentivising by inducement and we agree with that.”

Hogarth says adoption of wrap will help move the industry toward trail-based models. He believes the extra margins that Paradigm’s growing financial muscle can bring from providers will help with this.

He says: “Take an asset manager such as UBS. They would offer IFAs 0.5 per cent, but we talk to them and negotiate an extra 10 basis points for the IFA to split with us. They then get 55bps, an extra 10 per cent of revenue for nothing, simply by us having the financial muscle to get these terms.”

He is supportive of the retail distribution review, saying this will help drive the move away from indemnity commission.

He says: “The product providers are between a rock and a hard place. On the one hand, they do not want to pay indemnity commission an more because they say, you guys keep churning it down. But it keeps getting churned because the providers are all paying out such high levels of indemnity commission. The RDR forces IFAs down the CAR route, which then comes back to recurring revenue.”


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