The parlous state of many UK financial advisers was recently highlighted by the publication of trad...
The parlous state of many UK financial advisers was recently highlighted by the publication of trading statements from Inter-Alliance and Berkeley Berry Birch, two of the UK's largest IFAs. Inter-Alliance shares fell by more than 70% on the day and BBB's by more than 19%.
Both companies remain heavy loss makers and blame weak stock market conditions for their problems.
In recent years, both companies have had to raise huge sums, mainly from insurance companies, to remain solvent. Inter-Alliance has raised more than £55m since the beginning of 2002 but, despite a recent £15m injection, if its losses continue at last year's rate, its cash reserves will rapidly dwindle.
Berkeley Berry Birch raised £20m in October 2002 but saw a cash outflow of more than £8m in its latest trading year. The balance sheet shows net cash of more than £14m so there should be no short-term worries but, clearly, time is running out for proof the business model is viable to emerge.
Another large quoted firm, Millfield Group, has also been running up large losses. Its loss before tax in the year to 31 March 2003 was £12.3m and a further £8.85m is now being raised.
There are two common factors in these cases. All the companies mentioned appear to believe their salvation lies in recruiting more advisers, either by normal recruitment or acquisition. These businesses are being kept alive financially by insurance companies that are seeking to take strategic stakes ahead of depolarisation.
The clients of these organisations face two worrying questions: Will their adviser still be in business in a year or two's time? And how will the substantial shareholdings of the insurance companies affect the services and advice they are offered in the future?
There is also the risk that advisers might be swallowed by other advisers, washing their hands of mis-selling liabilities in the process. RJ Temple and the Lighthouse Group recently carried out this manoeuvre, leaving RJ Temple clients reliant on the Investors Compensation Scheme should they seek redress from mis-selling, a far from the satisfactory state of affairs for the rest of the industry.
I am not convinced endlessly recruiting large numbers of advisers will steer these groups back into profitability. A report by Durlacher earlier this year stated that average Inter-Alliance adviser productivity last year was just £43,000. Based on this figure, recruiting more advisers is likely to lead to ever greater losses.
I believe the key to profitability is to run a tight, compliant, ship, keeping a lid on costs and avoiding the build-up of loss-making intermediaries.
Many advisers are suffering due to their focus on initial rather than trail commissions. Advisers who generally sacrifice trail commission for higher initial commission have no option but to constantly bring in new business to generate revenue. This leaves little time for looking after existing clients and can cause concern over how independent their advice really is.
John Spiers, chairman & managing director, Bestinvest (Brokers) Plc
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