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November 20, 2009updated 05 Jun 2017 11:39am

Let the IFA carve-up begin

The Retail Distribution Review will mark the biggest shake-up in Britains independent investment advisory sector in living memory Private banks are already manoeuvring to pick up the cream of the business as IFAs exit under the impact of the tough incoming regime

By John Evans

The Retail Distribution Review will mark the biggest shake-up in Britain’s independent investment advisory sector in living memory. Private banks are already manoeuvring to pick up the cream of the business as IFAs exit under the impact of the tough incoming regime. John Evans reports.

Under the Financial Services Authority’s Retail Distribution Review (RDR) proposals, for which a consultation period ended last month ahead of its formal introduction due in 2012, commission-based selling is effectively to be banned and advisers will have to meet increased minimum qualification requirements.

The adoption of a fee-based model – along with higher regulatory costs – is widely seen as placing a greater burden on intermediaries like independent financial advisers (IFAs) while, at the same time, giving private banks – with their fee-based model for investment services to wealthy clients – a competitive edge.

The economic downturn and investor caution is also contributing to what may prove to be huge attrition among IFA numbers in coming months.

Some 265 of the top IFA firms will end the year in financial difficulty with a further “spike” of failures next year, according to researchers Plimsoll, assessing the prospects of the top 1,000 IFA companies.

After clinging on through the bad times, many of these struggling companies are going to run out of time and “fail just before the recovery really takes hold,” says David Pattison, author of the report. Some of them are just too weak to carry on, he adds.

One in three companies will next year make a loss and a further third will suffer financial difficulty, his report suggests. The IFA industry will see “lots of takeovers (and) a number of high-profile failures”.

That bleak prognosis is echoed elsewhere. As much as 40 percent of the adviser market will go as a result of RDR, according to Malcolm Small, a portfolio planning expert. He contends that the “potent RDR cocktail” of new stringent qualifications, capital adequacy requirements and the transition to fee-based charging will force out many advisers.

A report commissioned by the FSA earlier this year on the likely impact of the changes admitted that around 10 percent of advisers would take early retirement rather than study to attain the new qualifications.

What also worries the IFA industry is that clients may be unwilling to pay their advisers upfront fees for advice, having become used to a system whereby IFAs chiefly receive commission from life and investment companies for recommending their products.

Research conducted by Scottish Widows suggests more than half of consumers – 54 percent – would be less willing to pay a fee for advice, with four-fifths saying they would look for an alternative or make their own arrangements.

What is clear is that the 3,200 financial intermediary firms in the UK have a huge influence over consumer savings, investments and pension planning. These companies, targeting the mass affluent (£100,000 to £1 million [$168,097 to $1.7 million]) and high net worth (£1 million plus) advise on a pile of some £3 trillion of personal assets.

Picking up the pieces

For the private banks keen to pick up higher-end business in the shakeout, the fight will centre on the estimated 150 or so IFA companies focusing on more affluent clients with £250,000 or more of net investable assets. These firms are reckoned to have control over, or influence, some £64 billion of private client assets.

In turn, about 20 percent of these firms are failing to generate more than £1 million of revenues and so is the segment where much of the consolidation is likely to happen, analysts believe.

McKinsey, in new research, predicted that wealth management businesses with up to £3 billion under management were likely to be courted by bigger players.

So far few private banks have articulated their plans to win new business as IFAs give up the advisory business in droves.

But one player has devised an aggressive strategy. At SG Hambros Bank, the UK arm of France’s Société Générale, plans have been hatched to exploit the big industry restructuring likely to be triggered by RDR.

SG Hambros wants to add some £1.3 billion in new assets to the £9 billion current under management over the next three years by a range of initiatives, including attracting IFA intermediaries, says Tracey Reddings, Hambros’ head of UK private banking.

The Hambros plan firstly involves the launch of an investment platform to attract intermediaries, using an open architecture approach, in order to give IFAs a painless way to help them transition to the RDR environment and manage client assets under the new regime.

Secondly, Reddings sees a number of IFAs unwilling to jump through all the hoops involved in RDR and instead selling out – giving Hambros the chance of selective acquisitions.

The average age of an individual IFA is put at 55, implying that many will want to sell out rather than gear up for RDR and all the new qualifications required, she asserts, in an interview.

“Do they want all that hassle over the next two to three years?” she asks. “We see a lot of consolidation in the IFA and individual advisors selling their business.”

The SG Hambros wealth threshold will be very selective, in looking for IFA-introduced clients with at least £250,000 upwards. The priority will be what Reddings calls a working partnership model with IFA companies and her bank may consider outright acquisitions of advisory firms at a later stage.

The SG Hambros wealth threshold will be very selective, looking for IFA-introduced clients with at least £250,000 upwards and “we will be looking at no more than 10 IFA operations to acquire.”

“More and more of the progressive independent adviser community are starting to turn to a fee-based model, akin to professional accountancy and solicitor practices, whereby their income is derived based on the ongoing services they deliver,” Reddings says.

“These more professional firms, most of which label themselves as financial planners and not IFAs, recognise the importance of a more systematic approach to investing. As such, they have recently been more predisposed to either hire fund managers themselves as an in-house resource or outsource this key function to specialists they can hire and fire if the performance or style of investing fails to live up to expectations.”

Because of this changing landscape, Reddings says, SG Hambros will be launching its platform and service to a select number of financial intermediaries, allowing them to professionally manage the affairs of their high net worth clients either by themselves or with their preferred discretionary fund supplier.

This “Intermediary Wealth Partnership Service” also offers a range of trust and fiduciary services as well as banking facilities.

Other firms have also signalled their willingness to scoop up IFA networks. Brokerage Collins Stewart has said it plans to double assets at its wealth management division to £10 billion, taking advantage of businesses up for sale ahead of the review.

Schroders’ private banking arm has also said it plans to expand through acquisitions and by attracting new advisers and their client lists. In addition, a new breed of conglomerate – the IFA consolidator – has made its appearance to exploit the advisory turmoil. A typical example of this type of player is Perspective Financial, which has bought nine IFAs and now has £20 million of funds under managed.

Founded in 1990 by Alan and Nicolette Chambers, the UK business specialises in long-term care planning.

Another consolidation vehicle, Firebird Investments, has made its first acquisition in the form of Oxfordshire-based Paul Temple Financial Services. Firebird was established by partners of City-based private client and IFA practice Phoenix Wealth Management.

Planning a number of purchases over the next three years, its strategy is to acquire IFA practices whose owners are looking for exit strategies, or to establish joint ventures with IFAs looking for help with business development.

Last-ditch opposition

Meanwhile, the IFA industry is making a last-ditch attempt to overturn RDR, at least in its present form.

IFA trade body Aifa declares that the plan to compel practicing advisers to reach new qualifications under the mandatory RDR requirements could be challenged with a judicial review if the FSA fails to listen to industry feedback.

Aifa director general Chris Cummings says the FSA should be encouraging IFAs to meet higher professional standards with regulatory incentives rather than imposing an “arbitrary cliff edge”.

SEI Investments suggests a compromise, in the form of the FSA imposing limits on commission payments rather than outlawing them completely.

Joseph P Ujobai, managing director of SEI Investments (Europe) declares: “While we agree to the removal of product/trail commission fees, we believe they should be removed only where they unduly influence the adviser from acting or offering advice in their client’s best interest.

“This is because a complete ban of such fees may be counter-productive given some of the benefits to the consumer in paying trail commission fees to their adviser.”

Ujobai also believes that the separation and transparency of adviser and product fee and hence removal or undue influence of product provider “should not necessarily be focused on pricing schedules but should instead be focused on other evidence and practice of a firm’s delivery of unbiased advice.”

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