David tops Goliath: Why the big firms are losing money

New figures suggest the bigger your business, the less profitable it is likely to be. But why? And how big (or small) should a firm be to maximise profits? Rahul Odedra investigates…

According to unpublished figures put together by the FSA, businesses with more than 50 advisers are struggling, while the vast majority of firms with fewer practitioners are enjoying healthy profits.

According to the data – collected from firms’ RMAR records and based on firms’ 2009 calendar year returns – the smaller your practice, the less likely it is to record a loss.

Just 8% of the 1,423 sole trader businesses lost money during the period, and 10% of firms with between five and ten advisers (see table below).

The figures contradict the perceived wisdom that the next step for a successful business is to upsize.

Sweet spot

Phil Billingham, strategy consultant at Threesixty, said he was not surprised by the figures and that in his experience those businesses with between five and 20 advisers were best-positioned.

“There’s a sweet spot in which a firm is large enough to have resource, capability and succession, but where they maintain that close relationship with their clients,” he said.

“Those firms are profitable per head and it’s the same numbers coming out all the time.”

Dwight Witmer, a former member of Aegon-owned national IFA Positive Solutions, and now an adviser with a smaller business, said poor recruitment standards were to blame for the poor performance of the largest firms.

“These companies have recruitment departments who just take on anyone, it doesn’t matter about the calibre.

“Firms seem to recruit advisers without checking if they have the compliance functions to cope.”

Dean Lamble, director of distribution development at Aviva, said problems can stem from the onset of a big-business culture when a company expands.

“There’s a natural point where you lose the entrepreneurial spirit and agility,” he said. “There’s a certain stage where you’ve got things like property and other regulatory costs affecting bigger companies.”

Despite the positivity about the state of small and medium sized firms, the FSA has been warned about benchmarking the success of the Retail Distribution Review against the figures.

Billingham said the data was collected during a low point in the markets when advisory activity had slowed, which could have skewed the numbers.

“It may also show a survivorship bias,” he added. “To put it bluntly, firms posting big losses at the moment won’t be in business much longer, so they’ve got to go beyond the numbers.”

He said the figures for firms with less than five advisers need to be considered carefully as they may include the income of their adviser-owners.

Meanwhile, Lamble feels more emphasis needs to be put on consumer outcomes, something he feels the regulator has dropped as RDR has progressed.

“The FSA is very good at looking at looking at the sustainability of the sector but not at the impact on consumers and the savings gap,” he said.

Profit vs loss: How firms compare on size (Source: FSA)