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The choice of reason

As a cynic, I believe CP121 is a done deal. But I would hope that the detail required to bring the new regime to life will be sufficiently clear to enable firms and their advi-sers to move forward.

The planning needed for the new regime is going to be fundamental for each and every IFA practice. The wholesale nature of change means that, for the first time, you may be faced with offers from providers in relation to your firm.

The choices you make will depend on the nature of your business and where you see yourself in one, three and five years time. The average IFA practice must face up to the reality of the proposed new regime and act quickly to prepare itself.

Start with an analysis of the different types of income received by your firm. The table (right) shows an example of a value-based rating of renewal commission. If the bulk of your business falls into strata one and three, you have the most secure and durable practice due to the fact that pensions have a longevity which accessible investments cannot give.

Then look at your clients and their profitability. Think about which clients lose your practice money. You will have to consider the difficult option of ditching clients who are economically unviable. It is a sad fact that pressure to drive down commission payments actually reduces access to independent advice.

Next, you must consider your options in the depolarised environment. If your business book has only a small number of providers on it, you may as well consider the potential of a multi-tie. If your practice is 100 per cent commission-based, then distributor status will be applicable to you.

If you work with professional connections, you will have no choice but to become independent. The Law Society insists that lawyers exercise the permitted third-party route by choosing an independent firm.

The Law Society has not been pressed to issue guidance and will not do so until the position is much clearer. The fact is that if the Law Society allows referral to distributor firms as an alternative to truly independent law firms, then this will allow advising law firms to become distributors. This type of inconsistency is going to make the whole decision of which option to plan for that much more difficult.

The simple way of looking at things is whether or not clients will require full independent advice. It is a sad fact that independent advice is not valued as much as it should be by consumers. If your clients do not like paying fees, then your options are limited. If your clients only do a narrow stratum of business, then, once again, you are moving yourself toward a multi-tie operation.

If you intend to retire, decide which way you want to deal with your business. A sale at the moment is less likely due to the uncertainty of market forces. You may want to merge into another business and take a more relaxed role. The time to start the planning is now.

Providers have already started knocking on doors and asking people whether they would be interested in joining them. This points to multi-ties and golden hello payments to join. Be very wary of such inducements as they nearly always have elements of clawback if targets are not met.

The range of deals being offered means that the value of small general practices will go up. Ironically, the bigger valued high-net-worth practices will fall in value as the overall risk profile of the advice given, such as drawdown and pension transfers, will make it much less attractive to make acquisitions with assumed prior advice liability.

You need to start your planning. You would be horrified if you knew how many IFA practices do not have keyperson cover, shareholder agreements, partnership agreements, employment contracts and so on. This lack of business planning shows through and the recommended analysis I have put forward allows you to value, plan income streams and choose a polarisation option. Not planning will prove very costly.

ANALYSIS OF IFA INCOME STREAMS

1. Pension fund-based renewal commission

2. Bond/unit trust/Isa/Pep fund-based renewal commission

3. Pension level commission

4. Regular-premium contract level commission

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