product providers are looking to offer intermediary firms access to capital at preferential rates
Norwich Union and Skandia have entered into a deal with network Bankhall to offer £30m in loans to its members, providing financing to intermediary firms in need of capital.
By the end of spring, Bankhall members will have access to loans at preferential rates to finance technology spending, recruitment of registered individuals and mergers and acquisitions.
Tony Murell, operations director at Bankhall, said that getting access to this capital was a way for firms to survive and expand without having to sell stakes to providers.
However borrowing money will not solve long-term problems for all intermediary firms. Increasing professional indemnity insurance is increasing the pressure on smaller intermediary companies to raise capital from outside the business.
Selling a stake to a provider is an obvious and increasingly popular way of doing this but some argue that selling to a life company could sound the death knell for a business. Peter Hargreaves, managing director of Hargreaves Lansdown, has ruled out the prospect of selling any of his business to the life industry. He pointed to the experience of the 1980s when life companies piled into the estate agency market with disastrous results. He said: 'If you sell to a life company it is just a matter of time before you'll be closed down. A number of intermediary firms that providers have stakes in are already in a shocking state.'
Fiona Price, founder of Fiona Price & Partners, disagrees. She said: 'Things are very different now from when the estate agency debacle occurred. There was a herd mentality then with all the insurers who had cash to spare piling in. Now life offices are in a much weaker financial position, making them much more discriminating. There is also uncertainty on where the new regulation will lead so they are adopting a wait-and-see approach.'
She added that with the current polarisation rules likely to undergo a fundamental change, it could make a lot of sense for providers to shore up a distribution channel that is essential to their business.
Alasdair Buchanan, communications director at Scottish Life, believes there is no obvious case for buying intermediary firms from a commercial perspective. He said: 'If you look at the Australian experience, providers who had stakes in advisory firms actually lost out because firms were so keen to demonstrate that they were not beholden to the provider.'
He argued the changes to polarisation could actually make purchasing an intermediary a less sound investment for providers. He said: 'There are a number of practical issues that would make it hard to justify the investment. An important part of the IFA business proposition is that they are independent. New rules on disclosure mean that any provider ownership could damage customer perceptions.'
Other large providers such as Standard Life and Clerical Medical are also sceptical about or hostile to a move that could be seen as trying to buy a distribution channel that is predominantly independent.
Price believes these problems of perception are significant hurdles but can be overcome. She sees significant benefits that providers could offer smaller companies, adding: 'There are tremendous resources in terms of access to legal services, back office facilities and technology that providers are in a position to offer advisers.'
Hargreaves questioned what knowledge or expertise providers could offer to intermediaries when their businesses are so different.
He said: 'I can't think of anything worse than sitting in a board meeting six times a year with the representative of a company that doesn't even know how to run its own affairs. I really don't think that there could be much value to their input.'
Robert Fletcher, director of distribution strategy at Norwich Union, which has stakes in other intermediary firms, said the life office had no intention of getting involved in the day-to-day management of a company. He added: 'We only buy stakes in companies where we see a management team that is going places. We respect their abilities to run the firm effectively. We recognise that IFAs are entrepreneurial businesses that need to move fast and the governance structures of life offices could stifle innovation.'
Whether or not life companies have practical resources that will benefit advisory firms, for some firms attracting capital from a provider may be the only way they can stay in business.
Kerry Nelson, senior investment adviser at Bates Investment services, said: 'With increases to professional indemnity premia, changes to the regulatory environment leading to a possible shift away from commission and soaring overheads, many companies are finding it tough to survive. Although they may feel it is against their ethos, they need to think with their head as well as their heart.'
Nelson pointed out there are other options intermediary firms can consider when seeking to evolve to meet the challenges they face in the new depolarised world.
She said: 'There is a sector of the market that will be under great pressure to reposition itself. Those firms that have between 10 and 30 registered individuals will have to look at either merging to become a sustainable businesses or selling stakes either to a provider or another type of investor.'
While Bates remains independent, Nelson said the firm is keeping an open mind on offers made by those seeking to get exposure to the sector and looking at a number of ways to raise finance to expand the business.
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