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Training or takeover?

Are IFAs a dying breed? A drop in the value of IFA firms, compounded by a lack of new blood entering the profession, is raising questions about the future of IFAs as a whole.

IFA Portfolio says advisers can no longer rely on the sale of their businesses to fund their pensions as these businesses are now worth less than half the value that they would have fetched three years ago.

Research carried out for IFA Portfolio by headhunter Seer Group, which polled its database of 400 UK IFA and general insurance firms, found buyers fearing that industry reviews could increase thepremiums on professionalindemnity insurance.

This factor, along with the additional burden of regu-lation, is pushing business prices down.

The IFA sales environment is also changing and many advisers may find themselves at the wrong end of the market.

Lower margins on products such as stakeholder could mean IFAs are left chasing people who do not have money to invest. Grimsby-based IFA Paul Duckworth suggests uncertainty about the possible end to polarisation is another factor in thedecline. He says: “The public has just got to grips with the difference between IFAs and tied agents and now looks like it will be confused again.”

Many IFAs believe the tightening of compliance in their sector is just a symptom of the way the whole business world is heading.

IFA Portfolio managing director Ted York suggests that IFAs could develop their businesses by selling non-regulated products such as medical or household insurance but the industry does not view this as a long-term solution.

IFA Bradbury Hamilton managing director Sheriar Bradbury says regulation has been dragging down the value of businesses and it is lik-ely that over time general ins-urance products will also become regulated.

Bradbury says: “I think we have got a bit more suffering to go through in the future. My concerns are they could take the reviews even further and if that does happen it could destroy practices altogether. It depends which way the Government wants to go but the sector is in jeopardy at the moment.”

According to Bradbury, the only way forward is expansion. Firms need to take a long-term view and accept that regulation is here to stay.

He believes that business will build up again in five years and there will be fewer IFAs. Only the bigger firms will be able to compete in the marketplace.

This view is supported by Seer Group industry consultant Jeff Bailey. He says the company&#39s research shows that business value is determined by the size of the firm. Small businesses are having trouble selling as buyers would rather buy one company with 15 employees than 15 smaller firms because it is easier to integrate bigger businesses.

However, this method of expansion is not entirely welcomed by the industry. Many small businesses feel they are being pushed out of the market. Letters are being sent to small firms offering to buy the business without giving an indication of how the valuations are being made.

Some IFAs feel such companies are taking unfair advantage of people who are trying to get out of the market.

A reduction in the number of IFA firms may be compensated by other professions taking up the slack. Lawyers and accountants could buy a firm&#39s client base without buying the liability. But that leaves the IFA still carrying the can in possible compensation claims.

IFAs should not bank on the sale of their business to fund their retirement. Many still believe the value of their business is dependent on themselves and their work rather than the client base. But IFA Norwest Consultants principal Harry Katz does not see why IFAs should feel any compulsion to retire at all.

He says: “IFAs can keep authorised until they drop dead and many do. There is no impetus to retire. You do not need to take on new business but you can just look after your existing business until it all filters away.”

Another option for IFAs to maintain business in retirement is to pass on responsibility to a younger partner but this is a major area of concern across the whole IFA industry.

The average age of an IFA is now 54 and there is a major shortage of younger partners to take over these businesses.

Small firms have found it increasingly difficult to bring in new recruits. It is very costly and time-consuming to bring somebody into the business because of the regulation and training requirements.

Supervision means an IFA has less time to devote to the business. There is also a compliance burden to having staff, which is another disincentive.

Direct sales, traditionally a hunting ground for IFA firms, are being cut back and the source of new blood is drying up.

Aifa director general Paul Smee says IFAs have to wake up to the fact that they have to bring in new talent. Both Aifa and Sofa are looking at ways that graduates can be attracted into the industry.

At present there is no clear career path for graduates. Sofa spokesman Robert Reid says it is trying to establish a “chartered” level of qualification equivalent to that of accountants and lawyers.

But will this make a difference when these professions charge fees and graduates are being recruited to an industry that is commission-based?

In order to survive, the industry must take a look at itself. IFAs must go back to basics and look at why clients come to them in the first place – for advice.

They need to accept the only way this service can continue is by expansion, whether this is by attracting new recruits or buying other firms.

IFAs need to follow their own advice and plan for their future.

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