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The fall of the small

One of the side-effects of moving out of London, as I did last year, is that it requires you to pack any day that you come into town with as many meetings as you can.

So it was that last Friday I criss-crossed the City and the West End, attending a range of long-standing appoint-ments with IFAs, fund managers and life offices, several of whom I had been promising to see for months.

One of my first meetings was with Aifa chief executive Chris Cummings. I hope to write up the result of that interview some time in the next week or two.

What was apposite about that meeting, however, is that it came on the day that the FSA published its rules on adviser-charging. Indeed, the announcement came as we sat in Chris Cumming’s office, with the tape machine running.

Later that afternoon, I went to Bestinvest’s offices near Hyde Park to see how they run their operation there, mainly in order to glean any insights that might be useful in future columns about how IFAs can best respond to the demands likely to be placed on them by the introduction of RDR in 2012.

I will return to the Bestinvest meeting in a minute. But one of the interesting things about my time with Chris was his candid admission that earlier predictions of an IFA industry being wiped out by the RDR are likely to be wide of the mark.

He cited surveys showing that from an initial estimate of up to 20 per cent of IFAs leaving the sector in 2012, updated research suggests that this had fallen to between five and 10 per cent. In other words, having taken a long, cool look at the various aspects of RDR, many IFAs are starting to think not in terms of shutting up shop but calculating how best to survive.

Chris Cummings’ own estimates are borne out by the FSA-commissioned study by Oxera, published within the document on adviser charging last week. Oxera suggests the main implication of the RDR will be that up to a quarter of firms close in their current form. This change will be largely if not wholly attributable to the provisions of the RDR.

However, that will not spell the end of IFAs as such. Oxera’s research found that the exodus will apply most strongly to practitioners belonging to small firms operating in the market. The most striking finding is that up to half of firms with revenues under £50,000 are either “very likely” or “likely” to close or sell.

But there will also be significant consolidation, as a result of which, it argues that even assuming no new entrants into the IFA community or growth among surviving firms, adviser numbers will drop by “just” 11 per cent.

Oxera says client numbers will also fall by a similar amount while IFA firms’ revenues may drop by up to 9 per cent, implying that the less affluent clients – many of whom use IFAs less often or contribute lower earnings to an IFA business anyway – may be forced to seek alternatives to independent advice.

Of course, these are all predictions, we have no idea of the long-term accuracy of these figures. But what it suggests is that independent advice will continue to be seen as important by the vast majority of existing IFA clients – and their advisers. That said, the overall structure of the industry will change.

On a number of IFA forums I attend – without contributing, naturally – this process of consolidation has been presented as a disaster. I find it hard to see things that way. Many small IFAs do a fantastic job for their clients and manage to put food on the table by running an operation out of a spare bedroom but increasingly, this is not what the future of independent advice is all about.

Which brings me to Bestinvest. Later on last Friday afternoon, I went to see them at their offices in Mayfair. It would be fair to say that Bestinvest is wildly different from the majority of IFA businesses, both in terms of its business model – which relies on recurring investment-based trail income – and also in the way its clients are serviced.

I have spoken about this before but it is worth repeating – if you are a Bestinvest client, even a “long-forgotten” one with a few thousand quid tucked away in a dimly remembered Isa, you will still receive regular six-monthly updates as to how your small portfolio is faring. Logging in online allows you to access real-time information on your investments as well as their underlying geographic and sector spread.

Yes, I know that many IFAs already offer a key element of Bestinvest’s own client proposition, including risk-rated portfolios designed to deliver both income and growth. What is striking about it is the sheer seamless professionalism of the service on offer – and no, I am not a client of the company.

I have said this before but in the coming months and years, IFAs will increasingly need to consider how best to deliver at least an approximation of such service to their own clients. In the New World, small is no longer beautiful, it simply will not cut the mustard with your savvier clients. What are you doing to redress that?

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. There is little doubt that the pressure is on the IFA sector to change and small firms may be more disproportionately pressured. But that is not the reason why many of them may cease to exist in the future.

    The internet and some technology solutions can make the smallest of firms look like major players. The “one man band” working from a home office already typically has a super client relationship offering. What they may need to do is embrace change and demonstrate some added value through additional services of the type Nic describes.

    In fact I suspect that a smaller firm with an open mind set, being quite nimble and able to implement change quite rapidly, can beat a larger firm even with their greater resources.

    What this all comes down to is an acceptance that firms need to evolve their client propositions. Some will and some won’t but I am not sure it is about size

  2. Martin O'Connell 9th April 2010 at 3:28 pm

    I agree with Nick entirely. What matters here is the approach to change and, in that regard, the size of the operation is, I believe, almost entirely irrelevant.

    We will all have come across large IFA firms that may struggle to adapt to the requirements of the RDR and one man bands who won’t. Certainly I have.

    To quote Darwin, it is not the strongest of the species that will survive, or the most intelligent but those most responsive to change.

  3. There are hundreds if not thousands of small IFA firms that will survive, we are more adaptable to change when and if it is necessary, we provide a service to our clients that they want. I get fed up with the one size fits all mentality that we must all adopt the practices of the “big boys”, Why?
    We have clients that have been with us for years, we service them well, and we get plenty of referrals, because of it. Of course there are good points about RDR there are also bad. How many of us are getting sick to the back teeth of providers offering and telling us how we can change our business in light of the changes. We will decide, when and if we need to, if we don’t provide the right service for our clients they will leave and we will go bust, simple.

  4. Robert Donaldson 9th April 2010 at 3:36 pm

    The people that go out of the industry whether or not working for a big or small firm will be those that do not wish to change or feel they are too old to take exams or make the required changes.

    However, the pressure is also on the larger firms I would like to see them compete with me in my one percent world they would find it very hard. I would also like to see them down tools on a Friday night or a weekend to see the client that needs to see you then. I would also like to see them used as a sounding board by a widow who has no one else to turn to for advice.

    I am sick to death of those saying that this is the death knell, it may be the last straw for some but not for all.

    Maybe Nic should stop speaking to the bigger IFAs and get himself out of London some time.

  5. Incompetent Regulators Award Team 12th April 2010 at 8:39 am

    Chris Cummings understand little about being a real IFA. And for him to believe FSA reports well that’s just the point to show which sides of the fence he is on. What is he selling? Himself and the new job he wants to find when AIFA are defunct. Yes of course some will survive, but to get the country to save again (just in case some havn’t noticed) we need to give clients a reason to save and a reason for advisers/salemen to sell. Call me what you want. I started 30 years ago as a life assurance salesman and I have served many clients honestly and profitably, what’s in a name?

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