Smallwood's Shout: Please mind the gap

Regardless of the many news articles now claiming there is light at the end of the recessionary tunnel, many businesses are still suffering with the dual burden of increasing debt and rising overheads.

Taking this into context with the inevitable growth in regulatory costs; capital adequacy requirements and training expenditure and it's very easy to see why many directly regulated adviser firms are now in a particularly vulnerable state.

In fact the story of the three little pigs springs to mind here and we all know what happened to the houses built from straw and sticks to save on labour and materials!

Putting humour aside, the irony of this famous fairytale is actually quite striking when we explore it further. In the same way that many businesses may now be very tempted to cut costs on general day to day running, just like the pigs who cut corners with sticks and straw, the failure of many businesses to insure against unforeseen risks (like wolves blowing down pigs' houses) is actually just as dangerous a threat. And even with a nice solid brick foundation - which might keep the wolves at bay - the business without adequate insurance and protection will be just as endangered longer term.

PROTECTION GAP

Given this, the recent research published by Legal & General makes for some alarming reading. According to the life office's report, the UK's business protection gap currently stands at somewhere in the region of £1.1 trillion pounds; with almost half of those surveyed admitting their company would probably survive less than 12 months if a key member of staff or management was taken long-term ill or passed away.

Of the 1,000 members of the Chambers of Commerce polled for the report, almost half also admitted their corporate debt was not protected, with 16% not even knowing if they had any cover at all.

Obviously the Legal & General research was looking at UK enterprise as a whole across many different sectors, but just because financial advisers should know better, it doesn't automatically follow that this is the case.

And it doesn't take much effort to find some very apposite examples of how hard the adviser sector has been hit by problems with debt. Even larger firms like Towergate Financial Services and the Money Portal have recently been forced into administration and in this type of climate there are not many banks still willing to lend money to smaller directly regulated IFA firms.

DETRIMENTAL

Another recent survey, this time by Watson Wyatt, showed that nearly half of all financial advisers believe that the retail distribution review and capital adequacy requirements will have a detrimental impact on the IFA sector. Over a quarter (27 per cent) of advisers said future regulatory changes will drive IFAs out of business and 10 per cent say they will reduce turnover.

In what may well seem to be a very uncomfortable irony then; whilst the failure of many UK businesses, in a wide variety of business sectors, to protect themselves adequately raises concerns, equally it does present some lucrative and plentiful opportunities for IFAs able to advise in this important area.

But just like the dentist with rotting teeth, for many directly regulated adviser firms facing an uncertain future in these difficult times, putting its own business protection plans in place must take priority. Only after having done this can we be confidently placed to pass on our good advice to others.

Chris Smallwood is CEO of 2plan Wealth Management