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A third of IFA firms are making an "unsustainable" loss because they are reluctant to pass on ever-increasing costs to customers, research by Plimsoll suggests.
With one in three companies in the IFA space in the red, Plimsoll warns many firms will "run out of cash" unless they refocus on their bottom lines and let consumers share the burden of escalating costs.
"Whether its fuel, materials or wage demands every company in the UK IFA industry is being squeezed by ever increasing costs," says Plimsoll lead analyst David Pattison.
According to the survey of 1000 advice firms, although more than half (52%) have seen gross margins fall in the last year, they are reluctant to pass on price rises for fear of losing customers to cost-savvy competitors.
"Falling profit margins across the industry is the first warning sign that this strategy has become unsustainable," says Pattison.
The report suggests the average profit margin in the UK IFA industry has fallen to 7% over the past two years. Out of 1000 firms, 293 were loss-making in that time, with 148 of those losing money for the second consecutive year.
"These companies face a tough decision - protect their market share and continue to lose money or adjust their prices to reflect their increased costs," adds Pattison.
"Without refocusing on the bottom line, many of these companies will simply run out of cash".
However, according to the analyst 385 companies have managed to increase their profit margins over the same period. In all, 707 companies have stayed in the black amid the inflationary environment.
"Clearly, operating profitably in the UK Independent financial advisors industry is difficult but not, as yet, impossible," concludes Pattison.
IFAonline readers are entitled to a £50 discount off the new edition of the Plimsoll Industry Analysis - Independent Financial Advisors. Call 01642 626400 for further details and quote reference PR/FL36.
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We fail because we don't have enough fine art
It is the FSA's strategy that is making the situation become unsustainable. We have a Regulator that is completely & utterly out of control.They appear to be working on a scorched earth policy to price out as many people from Independent advice and put out of business as many IFAs as they can. The fewer IFAs that are left,the higher the crippling financial burden
Posted by: PD Off
And those that are profitable?
This is worrying. I can see FSCS levy rising as these failing firms drop out and leave the profitable to pick up the tab. Also with the rush to acquire IFAs up to 2012, I do wonder whether the necessary due diligence is being carried out. CA rules need introducing fast and wait for the squeel when these unprofitable firms suddenly have to find liquid assets.
Posted by: Sam Caunt
How much to fix an ISA?
OK - man walks in to our office and asks "How much do you want to arrange an ISA?" We reply - "Our standard charge is 3% of the investment as part of the "up front charge"." Hopefully the man says OK and we go ahead and invest £10k. Now we all know that the compliance work will mean that we spend half a day setting up all the compliance work that the FSA insists on. If we say we need to charge £150 an hour and it takes 3 hours - thats £450 - so we lose £150 to start with! Now out of the £300 fee we collect we have to pay 35% to cover our compliance overheads, so that leaves us £195 for 3 hours work. I make that £85 an hour and now to cap it all we take 0.5% trail to cover ongoing service. At the end of the year the client comes in again and says "I think that I would like to come out of this fund you put me in as I fancy putting my money in to the Latin America Fund!". (or something like that) Compliance now say that we have to do everything we did to set the plan up again!!! EOR Risk assessment and suit letter! All out of the £50 trail, so we now lose £400! and this time it is real money! Question. Should we give him £50 to go away when he first came in to the office? It looks as though that would be cheaper than arranging the investment!
Posted by: Johnny come lately
simples
charge a fair rate and if that means no new client then so be it, i've just checked my office sign and still no charity mentioned on it. If it is not profitable don't do it.....why should the profits subsidise the losses, does not make sense - be fair to the client and let them know what it costs, an ISA for £300, no thanks. Bigger fish in the pond....be professional.
Posted by: Fraser Brydon
Nut Shell
In a nutshell. Barrier to entry raised to keep out the small and very small. Middle England to be dumped in the same manner as the Home service companies were forced out.. And as the critical mass of IFAs that remain decrease as PD says the levy burden already out of control and unsustainable will drive many more out it is a downward spiral that is inevitable under this current regime and system. In just a few years we have seen advisor numbers drop from around 200,000 to around 50,000 soon to drop to 30,000 and then who knows ?? Whilst on the other side of the balance sheet we have seen the costs of regulation spiral up out of control so that today the costs of regulation are more than the compensation paid out in recompense to successful complainants.
Posted by: Mr Fisher
UK plc
To take the unfashionable UK plc point of view, the fewer talented and hhighly-trained people wasted in professions that create no wealth the better, when you might be doing something productive. Those of you who specialise in tax advice destroy 39 times their own income (in national wealth) according to a recent study. So don't bleat about being prevented from making a decent (if parasitic) living from the labours of others - do something useful! Call it Heathonomics if you will..
Posted by: HeathCo
Get smart
Ive been an ifa for 25yrs never had a complaint upheld and make over 250k p.a How ! Sell to the dumb and dumber they never complain dont understand percentages and id rather have 6% of 50k than 1% of 300k 6+1% put it in your offering tell them and get back to selling ! advising is for whimps !Our profits are over 50% and we run rings round the FSA (bullshit beats Brains )Trying to be an adviser is futile the whole industry is a pile of shit -but where there's shit there's brass if your smart that is !
Posted by: fox in the box
Tripe without onions
Fox in the Box You're taking the Michael - or at least I hope so! As to the article; Plimsoll have been disseminating this kind of tripe for years. They either come out with the results that their paymasters require or just issue press releases that are aimed at generating more business. As to the validity of their findings – a definite competitor for Andrex. So which third? Large outfits presumably. So if you include a network that isn’t making money is that one IFA or is it the entire membership? Logic will tell you that if a small IFA isn’t making money he’s out of business as he has no Sugar Daddy to bail him out. So if it’s the bigger organisations to which they refer – so tell us something new. Who would pay a consultant to tell them something that is patently obvious – the daft larger companies that can’t make a profit – of course. Hans Anderson comes to mind.
Posted by: Harry Katz
To fee or no to fee!
LIke most commentators I used to make a loss every time I set up a small PEP or ISA. One day I met a new client who had just read an article in The Sunday Times where he was advised only to deal with fee charging advisers. I did carry out a full review, but the only thing I could advise was for his wife to take up her TESSA allowance. For that I charged £450, leaving her to do all the paperwork and they was quite happy. That of course, was perfectly acceptable to the regulators. Wouldn't it be nice if all our customers were so gullible!
Posted by: Clever?
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Brilliant
Putting your charges up is fine if you are already established. Your clients will understand what you offer and that it represents fair value. For those of us that run relatively new businesses high charges are unappealing to potential clients and coupled with high fixed costs mean that starting a new IFA business is a non starter. Well done FSA for taking all the profit out of distribution and in addition making it a completely miserable field to be operating in while watching over your shoulder to be told afterwards that you're doing something wrong. I am utterly fed up with being regulated out of business and shortly the public will start getting very angry at the lack of any help and advice. First it was the home service that was regulated out of existence, now it's the service for middle England.
Posted by: Mr Smug