Here is my response to Phil Young’s recent article: Big: How size can work against a large advisory business using his numbering:
1 The core cost of running the business is much higher before any advice is given
Our researches indicate that there is no debate around the increase in core costs. Apart from a few rain forests of extra regulation to consider and obey, the increased levels of research and of due diligence are of a new order.
The estimable Richard Hobbs of Lanson’s phrased it well in 2011: “The FSA has raised the bar on how much product knowledge will be needed to give suitable independent advice. They have also driven much more cost into the business. So a restricted platform style solution is the way to go to control cost and effort.”
We have already had indications of the FCA disputing whether an IFA had the competence of conducting a due diligence process on outsourcing, We will see more of this.
I suspect the core cost of running a minimal optimal IFA business is around £75,000-100,000 (premises and basic expenses, IT, admin, paraplanning, compliance and research). I would want to amortise this against at least three advisers.
Like Phil, we do not see large IFA businesses working. In our paper, we placed a maximum on size. Our guess is around 60 advisers, but it is a guess (but by an actuary!).
I am not sure about Phil’s point on regulatory disinterest. You cannot be non-compliant because the odds are good.
2 The need for wider and specialist knowledge is increasing
This one is a no-brainer! I am afraid that we have much evidence that such competences are not held within small firms.
Albeit not part of our research, I have been judging numerous award entries recently for major adviser awards. Some are exhilarating in their content and understanding. Some are seriously scary.
A couple of recent examples were from chartered financial planners and should be referred to the regulator!
There are many benchmark firms. When you look at the websites of the very best, you can see the complimentary expertise and experience of their advisers, which is what a discerning client will want.
Phil’s point on long term care is accurate but, possibly,, misleading.
In a recent set of case study answers I looked at, a number of entrants suggested IHT mitigation solutions, including gifting, where the individuals were under-pensioned and in early 50’s.
Personally, I found this formulaic. Much more importantly, not one mentioned the one word that matters in such advice more than any other – longevity.
Not only is this the major issue for financial advisers today, it means that an adviser with pre-post retirement clients, with a focus on investment, is likely to need a myriad of other competences as the cohort ages (low growth, a little inflation and an NHS gone broke!).
3 Succession within the business is essential to the client
Phil is, I am sure, correct that would-be clients do not look at succession. That does not mean they should not. It is in the industry’s interest to help clients select a good, suitable adviser firm. We are often too keen to defend the bad, or, at least, turn a blind eye.
It is now more important than ever. Baby boomers are the rump of adviser businesses. Many advisers are in their 50s and 60’s; so are their clients.
An old IFA colleague retold what a client had said to him: “Arthur, you are in your sixties now and so am I. I will still need advice in 20 years. It won’t come from you.” For me that says it all.
Imagine a client of 65, 70 or 75, facing issues of adequate income, possible health issues, possible inheritance tax issues, possible LTC issues (a parent may still be alive, don’t forget). Why would he or she want to try to find a new firm? Why would he want to waste £2,000 to £5,000 for a full report that a new IFA would insist on? I do not know solicitor or accountancy where that would happen. It is not professional.
Succession didn’t matter in the guns for hire world of the past, but it does in professional world.
4. Networks and nationals will largely become restricted or vertically integrated businesses
We have no disagreements on networks and nationals. As a life co sales director in the 90s, I could never understand the relationship between independence and commission. Most of these firms were, in effect, multi-ties for the biggest commission payers. They sold life co bonds when ISAs were the right answer. Have the leopards changed their spots? Of course, not.
I learned when studying for an MBA many years ago that good businesses really value their suppliers.
Firms like Volkswagen have superb, long-term relationships with them and they prosper. I applied this logic when setting up my own firm and it really works. Yet in IFA world, I see or hear far too often (including this blog) that providers are awful and we don’t need them and that the future is all about us wonderful, talented IFAs. That view is a stupid as it is naive.
Advisers need funds, insurance plans, platforms and many other products. It is about partnership. Being brutal, I can see funds and insurers surviving without IFAs (they do in most of Europe and more and more are international). IFAs cannot survive without providers.
One very final point – many of my critics (of which there are justifiably many) argue that they have been doing this or that for 10/15/20 years, therefore it works. The point is that the past matters not.
RDR has changed the world and we have yet to see most of that change.