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The numbers game

The argument that bancassurance is threatening IFAs is tired and irrelevant

The proverbial cat may have nine lives but, as readers of this paper all know by now, IFAs have more. They have been killed off more times than anyone can probably remember.

Admittedly I, too, have played my part in “killing” off the IFA. When I was working at Money Marketing in 1999, I reported on the front page that “the number of IFAs is set to be slashed by the impact of technology and a surge in low-cost financial products”.

That was the prediction of KPMG, which argued that stakeholder pensions and Isas would freeze IFAs out of the market and that 40 per cent will fall by the wayside. Advisers’ problems will be compounded by their failure to invest in new technology, it added.

It has not happened, of course. Stakeholder pensions have been a spectacular failure while Isa sales never properly recovered after the technology bubble burst a year after the KMPG story was published.

The City regulator no longer keeps track of the number of IFAs in existence but the membership of Aifa has barely changed and it accounts for the lion’s share of advisers out there. It had around 18,000 members in its inaugural year in 1999 and has around 19,000 today.

Depolarisation was also expected to see IFA numbers dwindle but again that has failed to materialise. Instead, IFAs have adapted to the changing marketplace. They have had little problem offering a fee option alongside a commission structure to accommodate the new independent status rules. Around 20 per cent are now believed to work on a fee basis only and the number of Aifa members that are whole of market are said to be “very few”.

There is, of course, mounting PI costs, which have sounded another death knell for IFAs. Undoubtedly, soaring PI premiums are difficult for some firms to handle but not the majority.

It is why I allowed myself a wry smile last week when I got the following press release from research analyst Datamonitor. Apparently, IFAs are once again under threat because “increased competition from areas such as bancassurance and multi-tie advisers are threatening key business areas while issues such as a resistance to new technology (that old chestnut again), all suggest that the industry must adapt if they want to survive in the long term”.

The bancassurance argument is such a tired one. The people who go to banks for advice today in a depolarised world are no different to those that went to their trusted branch in a polarised world. Do we honestly think they are more likely to go to a bank because they get the choice of more than one product? Survey after survey has shown that many people have no idea what type of advice they are getting from their bank. Many have long thought that they were getting independent advice.

The savvy people who know what type of advice they want go to an IFA.

The banks and the private banks are on the warpath at the moment in the hope of grabbing a share of the growing high-net-worth population. It will be a hard fought battle.

When it comes to the high-net-worth community, the IFA sector is their main source of financial advice, with an increasing number of high earners choosing to stay with IFAs even when they have accumulated significant investable assets.

It is not just the impartiality or the closeness of the relationship that gives them comfort. High earners typically dislike paying commission, preferring to pay fees for financial advice. Therefore, the price structure of many wealth management services is a significant barrier to high earners who naturally compare the services on offer to the advice-driven model of IFAs.

But the high-net-worth population is just one area where IFAs are invaluable. We are in an age when financial planning is ever more important. The final-salary pensions that previous generations have been able to rely on are fast fading. Younger generations looking to secure their financial future in old age need to plan ahead and consider all the options. Increasing longevity, new pension rules and a relatively low inheritance tax threshold caused by a booming property market is increasing the need for professional independent advice – not diminishing it.

On the Datamonitor press release, there was a line which said: “Apologies if this story is not of relevance to you.” It is irrelevant, full stop.

Paul Farrow is deputy personal finance editor of The Sunday TelegraphMoney Marketing50 Poland Street, London W1F 7AXScottish Equitable’s veteran pension guru Stewart Ritchie is alarmed that IFAs might find themselves carrying the can for complaints arising from employees who get sweeteners to leave defined-benefit pension schemes early.

What’s more, Ritchie has warned the FSA and The Pensions Regulator about the situation where companies want people out of DB schemes to reduce liabilities and may be pushing too hard for people to do so.

He says IFAs brought in by the companies – as they are required to do – who advise those scheme members may find themselves in a difficult situation.

The individuals may want to leave the scheme, the employer will certainly want them too, but perhaps it is best advice to do everything possible to persuade the client to stay in.

The implication is that IFAs may be the ones who get sued or hauled in front of the ombudsman years hence.

Ritchie warns that it is almost impossible to tell what the best advice is, other than with the benefit of hindsight, and all advisers know just how badly they have fared at the hands of Government and regulator on such occasions.

Writing in this week’s issue of Money Marketing, columnist Robert Reid says IFAs should not advise on these schemes and says these inducements are bribes. He believes advisers should send the employees back to their human resources departments with some difficult questions.

Money Marketing finds it difficult to argue with two such influential and experienced pension professionals from the provider and adviser sides.

Some might suggest that allowing employers to manage down their liabilities could be for the greater good but in all these situations any unfairness affecting individuals only serves to drag down the reputation of pensions as a whole at a time when it least needs it.

IFAs should not be made the scapegoats. The next time that the Government messes up, as it has done with ASW and other collapsed schemes, it will not have the luxury of saying the small print told people they should seek advice. There won’t be enough advisers to go to.

The regulators need to give some guidance urgently.

Paul Farrow is deputy personal finance editor of The Sunday Telegraph

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