“Already an endangered species due to market and regulatory pressures, the small IFA may now face extinction at the hands of the dominant service providers.” So concludes a report by consultant Cap Gemini Ernst & Young into the impact of the proposed changes to polarisation.
The research, based on consultation with industry executives, is at odds with the report commissioned by the FSA from London Economics, which concluded that “the IFA channel would not diminish significantly if multi-tied agents came into the market”.
The Cap Gemini Ernst & Young findings, published earlier this month, make grim reading. The report suggests independence may not be the best strategy for IFAs, who will see increased competition, and that smaller IFAs should look to multi-ties as an escape route. As smaller IFAs migrate, it predicts IFAs' market share will shrink and the most successful IFAs will be those specialising at the upper end of the market.
On this basis, networks will be the main casualties of depolarisation. Smaller practices will need more than the regulatory support offered by the networks and will be driven into the bosom of providers.
Cap Gemini Ernst & Young vice-president Shaun Crawford says: “The current FSA proposals will result in a marketplace dominated by powerful providers linked together in multi-tie arrangements, only selling each other's products.”
This bleak scenario is endorsed by some others in the industry. IFAP acting chief executive officer David Elms says: “It is incredibly bad news for IFAs. It is not just the networks but IFAs generally who will suffer if the proposals go ahead.”
However, many of the more war-weary in the industry counsel caution. Scottish Widows head of IFA sales development Robert Wyllie says: “It is easy to grab headlines but it is premature as the second stage of the FSA polarisation consultation has not even started yet. ” Consultation on the first phase of the polarisation review is currently under way, with consultation on the more wide-ranging phase two due to start soon.
But Crawford fears changes to the polarisation regime are driven by political considerations and are inevitable.
He says: “Elections are coming and the last thing the Government wants is for this to fail. It is more likely to be an immediate success if depolarisation is restricted to stakeholder and Isas.” If this goes smoothly, he believes it is inevitable for the Government to roll out further changes.
But IFAs – even the smaller of the species – are not yet willing to accept the status of dodos. Repeated announcements of their impending demise provoke little more than weary stoicism. Misys head of marketing Andrew Bedford says: “We have been hearing a lot about the extinction of the smaller IFA for the last 10 years.”
Likewise, Aifa director general Paul Smee says: “Small IFAs have been written off many times before and they have proved to be extremely resilient. It is dangerous for consultants to decide for themselves what a multi-tie is and then draw conclusions from that when they do not really know the geography at all.”
DBS spokeswoman Sue Lewis points out that the ABI business figures released at the end of last year show IFAs took 69 per cent of new life, pension and collective investment business.
These results were achieved without multimillionpound marketing spends, massive client banks or big branch networks.
IFAs are proud to point out that consumers have consistently voted with their feet. Bedford says: “People are beginning to value advice and that is why the independent sector will continue to get bigger.”
Smee says: “Changes are driven by the market. Without the view of the investor, this research can only be an incomplete piece of work.”
Wyllie puts it another way. “Would consumers suddenly no longer find independent advice attractive after depolarisation?” he asks.
The only finding of the research that Bedford is willing to endorse is the necessity of targeting attention at the upper end of the market. “IFAs do have to move more into investments and the corporate market,” he says.
But he adds that, as many smaller IFAs have low overheads, they can profitably sell Isas, for example, and may not need to reconsider their market.
With 10,000 IFAs out of a total of around 25,000 belonging to networks, how do they react to the predicted exodus of smaller firms? Again, Bedford says: “I cannot see any reason for a fundamental shift. Our members are advisers rather than product sellers.”
There is fighting talk from Lewis, too. She says: “Depolarisation is yet another area of competition, such as telephone and internet services, which IFAs will deal with successfully as they have done before.”
What about the life offices predicted to soak up the ailing IFAs? Clerical Medical pensions strategy manager Nigel Stammers agrees some providers would be looking to buy out some of the smaller IFAs if the stage two proposals go ahead. He says multi-ties would be an easy way for the beleaguered small IFA to remain in business.
But he adds: “Phase one was important to secure supply for stakeholder. Going any further is not warranted. We have a balanced distribution strategy and see no reason to rush into any changes.”
Framlington group marketing director Craig Walton says: “The changes were intended to benefit consumers but the Government is now in danger of throwing out the baby with the bath water.”
He believes good IFAs will continue to thrive, even though there will be new pressures, and thinks there will be no changes to the traditional network structure in the short term.
But Walton does admit the new regime would offer attractive business opportunities. “Ending polarisation will allow us wider distribution. The life houses will be able to add our products to their own line-up,” he says.
In the clouds that surround the debate on polarisation, Lewis sees silver linings. “Financial awareness is growing. The more discussion that takes place, the more that financial awareness develops. This can only work in the favour of the IFA,” she says.