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The stakes are high in dash for distribution

The motives of providers taking equity stakes in IFAs are being scrutinised carefully by an industry preparing for the brave new world after depolarisation.

The dash for distribution has been one of the most pervasive cliches of recent months and what precisely product providers have to gain from their stakes in the independent distribution channel is open to conjecture.

Speculation has increased after last week&#39s announcement that Norwich Union and Friends Provident have both invested £9.5m to take a 10 per cent stake each and provide loan capital to Tenet Group, which owns the M&E and Interdependence network.

Tenet Group chief executive Simon Hudson says he approached the providers. The rationale was to provide long-term security and capital for the IFA network rather than pre-empt any outcome from the FSA consultation on depolarisation. In return, the providers say they are happy to support the IFAs, on whom much of their business depends.

The question remains, why it is largely only product pro-viders which are making these investments in IFAs? The fact that neither provider is able to rule out future multitie arrangements does nothing to allay the suspicions that the companies are buying distribution.

Bates Investment head of research James Dalby says: “Surely the providers are looking to secure distribution? Look at the size of the stakes they take – just under 10 per cent.”

Some providers have gone further, with AMP and Skandia taking complete control of Towry Law and Bankhall respectively. Of the main IFA providers, stances range from NU&#39s enthusiasm for minority stakes to Standard Life&#39s reluctant acceptance.

Standard Life chief executive Iain Lumsden recently accepted that it would have to consider buying IFA businesses if a tempting proposition fell in its lap.

NU&#39s stake in Tenet complements the stakes it has in all listed IFA firms.

Sales and marketing director Peter Hales says any agreement or pre-agreement to multi-tie would be a breach of the rules. But he accepts that providers with a significant shareholding would be in a strong position although he says NU is not in the business of buying distribution.

The FSA points out that the better than best rules still apply and if firms are deemed to be acting in a consortium, the rules could come into operation under the current 10 per cent limit.

Commerzbank insurance analyst Roman Cizdyn says the amounts involved at the moment are small beer considering the size of the insurance companies involved. He points out that the scramble by life offices to buy estate agents in the late 1980s, with which the current situation is sometimes compared, was quite different, with companies such as Prudential spending comparatively much bigger amounts to buy up distribution.

Cizdyn says buying the stakes allows providers to keep their options open as well at tap into detailed information and benefit from a warm glow as a result of the closer relationship.

But, fundamentally, Cizdyn says the stakes are there in preparation for multi-ties. “Basically, the companies do not want to be left naked if certain things come to pass. By taking stakes in IFAs, they have some clothes if it does happen,” he says.

Because the investments are relatively small, Cizdyn says if the bet does not pay off, the companies are likely to view the investments as good value anyway.

The fact that it is almost only providers taking stakes in IFAs is likely to further underscore the perception that the stakes in IFAs are largely connected with securing distribution.

Inter-Alliance has become a special case, as witnessed by its classification as a special situation following the Evolution Group&#39s big investment in the IFA and City confidence in chairman and chief executive Keith Carby.

The other major shareholders will all be names familiar to IFAs – other than NU, there is Gartmore, Merrill Lynch and Clerical Medical Investment Management.

Inter-Alliance corporate relations manager Charles Ansdell says it is only natural that there would be speculation about the nature of inv-estments in IFA firms, given the consultation that is taking place. However, he bel-ieves it is wrong to presuppose that the stakes are taken with a view to multi-tying, as other institutional shareholders could take a very different view.

Nevertheless, the fact that retail fund providers also operate on the institutional front can lead to confusion about the exact nature of a big investment in an IFA firm. Dalby says he has spoken to Merrill Lynch and is confident that the investment in Inter-Alliance is a pure investment decision rather than a strategic one.

But conflicts of interest could be an issue for the future. Dalby says: “We have yet to see the way in which provider bias is going to be policed.”

He suggests that one reason why life companies and not fund houses are looking to buy up distribution is that competition is much more concentrated for life companies, who also have to operate under price constraints.

Syndaxi Financial Planning principal Robert Reid points out the only IFAs that providers are trying to “capitalise” are the bigger firms.

He says even with the bigger IFA companies, there are going to be some interesting cultural differences.

Reid says the life companies will also be aware of the dangers of being left behind.

While we can be sure that behind the scenes most pro-viders and IFAs are engaged in negotiations, any outcomes will have to await the announcement of the FSA&#39s rules for the new depolarised world.


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