At a recent IFA event I attended the average age of principals was fifty plus and the general consensus, “I have a client base; I will service that for income until retirement and then I will realise capital value through a trade sale…” But what happens to advice after that?
It remains a fundamental truth that most either live too long, die too soon or get sick sometime in their life. But demographics mean the state cannot cope, so those with capacity still need to understand how to properly order their affairs. The plethora of information on the internet, leads few to take action – as the “success” of stakeholder pensions clearly demonstrated. So there remains a clear and continuing need for clients to be properly advised.
It is the failure of the political and regulatory classes to recognise the need for and the value of independent financial advice, coupled sadly with the headline grabbing scandals of a significant minority that have led to years of atrophy in our sector.
There has been much conjecture about what IFA firms will look like after January 2013. Most advisers came up through the direct sales culture where the biggest single issue was prospecting for, then servicing and “owning” clients. For many the very idea of letting anyone else anywhere near their clients remains anathema. But does RDR give us an opportunity to revisit this model?
In accountancy and the law partners traditionally sell time. 25 billable hours a week at £250 per hour over 48 weeks generates gross revenues of £300,000 less overhead. There is clearly a ceiling on net profit and the business model is not readily scalable. Those other professions tend to have trainees that work 35 billable hours per week at a cost of somewhere between £15 and £25 per hour and invoice them out at between £75 and £150. If a principal can supervise five, £25 per hour trainees, at £125 per hour that is a gross profit of £500 per hour. In other words a principal can make literally twice as much supervising others as he can from servicing his own clients. The model could replicate with a large number of well supervised, salaried advisers.
Few, if any, IFA businesses have actually developed a brand that drives a sufficient number of clients through the door to start the advice process in real volume. Years of financial scandal, most of which is nothing to do with IFAs, has tarnished the concept of financial advice so that seeking it is not the default position for many potential clients.
So my manifesto:
Regulators continue to root out the dishonest and incompetent but start to trumpet that there is a real value in the advice process (Get rid of “MA” she’s an embarrassment)
Introduce a 15 year long stop – it is stifling growth and innovation in the sector.
Publish a best practice guide “if you advise like this you cannot be sued.”
IFAs have to think beyond the next three years and instead of working with a small number of existing, trusted clients take the risk of recruiting new clients in volume.
Recruit trainees and para planners and let them develop these new clients for your business.
Before anyone blogs that two and three are impossible dreams, there does seem to be some movement on the long stop, and we have already seen best practice guides on pension switching – about 20 years too late but it is there; and high level papers on ATR and loss.
Let’s hope the FCA continues this work.
Simon Webster is the managing director of Facts & Figures: Chartered Financial Planners