One in seven IFAs is in the "dangerous" position of using an overdraft as a permanent means of finance, a study suggests.
Analysis of 1,347 UK adviser firms by Plimsoll shows 189 use the debt facility despite the unprecedented financial turmoil of the last fortnight.
The FSA says the practice is not against its IFA capital adequacy rules but Plimsoll warns many IFAs would be unable to afford it if banks began calling in any unsecured finance.
The findings are part of Plimsoll’s latest study of the IFA market, which also found at least 164 firms are running a “dangerously high chance” of failure in 2009.
“Of most significance, is the amount of independent financial advisers firms using an overdraft as a permanent means of finance - a dangerous position for any company to find itself in,” says Plimsoll senior analyst David Pattison.
“The banks are taking a critical look at all unsecured finance and are reassessing their exposure to small businesses- this could leave these firms in a position where their overdraft would need paying back on demand.
“Many of these firms simply cannot afford to do this.”
An FSA spokesman says: “There is nothing to prevent IFA businesses operating overdrafts as long as they meet the FSA's capital resources requirements.”
Under FSA Principles three and four, a firm is required to take “reasonable care” to maintain adequate financial resources.
The Plimsoll analysis found 310 of the 1,347 firms are losing money as a result of “rising costs and price reductions set against a slowing market”.
Pattison says: “2008 has not been a comfortable year and economic conditions are accelerating the rate of change in the market.
“Companies are faced with a stark choice: hold on to sales at reduced margins, or opt to reduce in size and scale.”
However, Plimsoll says the latest report is not entirely doom and gloom, as 118 firms have reported a return to profit after having previously reported losses, pointing out it is as a result of “tighter cost control and a reduction in overheads”.
The Analysis is available priced £350 by calling Clair Sherwood on 01642 626422 or emailing [email protected]
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