Advisers face whole new world as IFA rules bite

Published on Friday 11 April 2008 19:24

SINCE the Financial Services Authority (FSA) came into being in December 2001, Scotland's independent financial advisers (IFAs) have been forced to cope with a raft of new regulations.

Now, with increased competition from banks and other companies offering financial advice, the pressure appears to be mounting on sole traders on our high streets.

Having dealt with the financial plans of hundreds of clients, the thoughts of many advisers will be turning to their own retirement – and succession planning for their businesses.

Although the average age of the UK's IFAs is 46, according to research carried out by the FSA last year, rather than the more commonly quoted 55, the lure of the golf course or a villa in Spain must loom large in many advisers' minds.

So what does the future hold for Scotland's IFAs?

Ken Taylor, a director of Mackenzie Taylor Wealth Management (MTWM), believes that many IFAs need to confront some home truths. "A lot of IFAs don't have a robust business model and therefore they're under attack from competitors," he said.

His firm – which he founded last year in Nairn, near Inverness, with Duncan Mackenzie – has adopted a strategy of dealing only with clients who have more than 250,000 to invest.

Taylor explains: "We deal with high net worth individuals. We also work in partnership with our clients, which is another fundamental difference, in that we charge ongoing remuneration rather than big commissions so that we can afford to invest the time and effort holding hands with them in the future.

"It's not about the product sale, it's about understanding the clients' needs, aspirations, fears and forming a partnership with them."

Information technology has helped MTWM to run its business from the Highlands but still work with a large number of clients in the south-east of England, a trend that the Association of Independent Financial advisers (AIFAs) believes is likely to continue as IFAs look for new ways in which to do business.

Taylor added: "I think very few IFAs have an exit strategy. I've got a young family and I'd like our business to provide me with a living for the next 15 or 20 years.

"Our view is we don't want MTWM to become a huge concern. We don't have the traditional model that 'this could happen in every town in Scotland'. But we're always open minded. If we ever come across the right individual, we would always be keen."

One way of dealing with succession planning is to merge with other firms – or be swallowed up by one of the bigger players. Towry Law – which has more than 650 staff spread across 12 UK offices – has grown dramatically in recent years. Last year, the firm's acquisitions included McGowan, in St Andrews, Fife, and Baker Tilly Financial Services, part of mid-tier accountancy firm Baker Tilly.

Andy Cowan, head of private client at Towry Law, said: "The necessity of being a larger IFA is that we believe you can only offer the right level of service to clients it you have some scale."

His firm also charges its clients fees, rather than commission from selling financial products. Cowan said it allows his firm to be independent.

"In order to build a business like ours, you need to have capital and you need to have financial backing," he said. "The problem for IFAs in general is that they have no capital and therefore they are not able to invest to build infrastructure in the way we have."

Cowan believes that the retail distribution review (RDR) – which is being carried out by the FSA and is due to issue an interim report on 29 April before its final report in November – will recommend that all IFAs should charge fees instead of earning commission.

He also thinks that the RDR will highlight the need for IFAs to look again at their qualifications.

Cowan said: "That's a big issue because, if you look at the demographics of IFAs, many are in their 50s and to start doing qualifications when you're in your 50s is not an easy thing to do.

"That's been a thing we've been shouting about for some time because the minimum qualifications in our industry are appallingly low. They are the equivalent of an O-grade in woodwork. The financial planning certificate, which is effectively the exam that IFAs need to pass to be licensed, is of an appallingly low standard.

"What the RDR says is that to call yourself independent you need to be qualified to a much higher level – advanced diploma or even chartered status."

FINANCIAL MOT IS SOUND ADVICE

CHANGE is the only constant you'll find in life, according to Graeme Mitchell, managing director of Lowland Financial, based in Galashiels.

But change, he believes, has helped to keep him fresh in his 25 years in the financial services sector, during which he has met challenges head on.

"We have made some big changes in the last two or three years," he explained. "We've concentrated a lot of our efforts on offering clients the chance to have a regular review.

"I think its very good from the clients' point of view because it's a bit like your car – if you don't service it every year, chances are you have a big problem waiting around the corner."

Lowland Financial also charges regular fees rather than concentrating on the hard sell with financial products.

Mitchell said: "For us, the review is not about a sale, it's about an opportunity for the client to tell us what's going on in their life and for us to say well you possibly need to adapt this to it or you're approaching retirement you need to change the funds you're in."

Although Mitchell is a long way from retirement, he said he does have to think about his clients, his staff and himself, as he won't be able to carry on working forever.

"It's not at the front of my mind," he said. "But, longer term, it's something I have to think about. Because I'm in that situation, I have a much better understanding of people who are also in business.

"A big part of retirement planning is what are you going to do with your business. If I'm facing the same issues, then I'm better able to help them plan."