Blog: Barclays’ exit is nothing to gloat about

Clive Waller, director at CWC Research, on why Barclays quitting branch-based financial planning is bad news for IFAs.

The recent news that Barclays Bank will no longer offer financial advice at branches is the most important story we have heard since the RDR’s content and direction became clear. I suspect the published IFA reaction to the news is about as wrong as it is possible to be. I say ‘published’, because I don’t believe most blogs are representative of the overall IFA community.

Nonetheless, there is an element of ‘groupthink’ at the moment. As a group, IFAs are confident, it appears, of the willingness of customers to pay adequate levels of fees, despite all empirical research, the most recent by Aviva (October 2010), suggesting that the vast majority will not. Just the other day I read that one of the most vociferous fans of fees and a hero of the new model adviser movement actually offer his clients commission offset. What a surprise!

Going back to Barclays, you don’t need to go to business school to understand the benefits of scale; you should not have to be an accountant to understand fixed and variable costs; you don’t need a diploma in marketing to understand the value of brand. Despite such common knowledge, it is surprising that IFAs are not scared. Why? Barclays Financial Planning has as much scale as the biggest adviser firms in the country.

It could, if it so wished, offer financial advice on a marginally costed basis, because it already has premises, customers, staff who can act as introducers. Also, whatever our view about banks, Barclays has a far better brand than any IFA in the country. Anyone who doubts the power of the bank brand should watch trusting customers asking staff for advice on all financial matters as if no alternative existed.

If the truth be known, I have as much belief in benefit of scale as I do in modern portfolio theory or the efficient frontier They all appear to work well enough in the business school classroom but are not so robust in practice.

As such, I believe that IFAs can run small businesses at lower unit costs. This is not the point. The point is that if a retail bank with millions of tame clients and loads of expertise cannot sell financial planning at a profit, what hope the average IFA to survive under the new regime?

Will other banks follow Barclays? They certainly face the same fundamentals.
Malcolm Kerr, director for Financial Services at Ernst and Young, said: “Our research and experience when working with retail banks suggests that the costs of deploying investment advisers and providing a full advice process are considerable: probably over £200,000pa when all relevant costs are taken into account. This implies fee rates of about £200 per hour, just to break even.”

The numbers suggest that it will be challenging to provide a viable investment advice proposition to mass market customers, particularly when the RDR makes it clear that the advice costs cannot be subsidised by anticipated margins from in-house products.

Radical changes to business models or some calibration of the proposed regulation will be required to open up access to advice for the mass market.

My guess is that other banks will try to make their models work. Moreover, one should not forget that Barclays still has a huge, successful operation in Barclays Wealth, so it is not exiting the advice business by any means.

Many financial advisers intend to move up-market too. I keep repeating my view on this one to anyone that will listen: if they have the competence, network and overall skills to operate in the very crowded HNW space, why are they not doing so now? The vast majority will not succeed in moving up-market. The fact that a bank such as Barclays cannot be profitable working from branches should not make IFAs happy. Unless IFAs can continue to succeed in the mass-market space, where they compete with high street banks now, it is not good news at all.