by Ash Patel, Managing Director, Fee Based Advice

Ash Patel, Managing Director, Fee Based Advice

The world as we know it is changing, the business model that we have worked with in the past, with high initial commissions cross-subsidising a large (mainly unprofitable) client bank, is not sustainable. IFA practices are under threat. With the tight financial constraints on both front’s, product providers and IFA practices, commission - the traditional income stream for most IFA’s - is very much in decline.

In contrast, the cost of running a practice is increasing dramatically, with increased regulatory and PI costs, increased investment costs, new technology (and reliance upon), staff and training costs; all of which can herald the end of the IFA business model as we know it.

So where does this leave you and your practice?

Ask yourself the few tough questions below and ascertain if you have the right business model.

• What makes a valued client – how do I know if they are profitable? Measuring the commission generated is only part of the calculation – do I know what costs have been incurred (do I really know!). Not only initially, but what costs are going to be incurred by that client/piece of business in the future?
• Who does what inside my practice, and is it the best use of their/my time, resources, and skills? Is it profitable?
• Once we start to move away from the old model of high/initial commissions and client cross subsidy towards a more “open architecture” environment, with total transparency, do I really know where costs are being incurred and where my profits are being generated? Unless I understand these issues, how will I know what to charge my clients (and for what)?
• Do I really understand the cost of acquisition – AND maintenance of my business/client relationships?
• Do I see my support team as being a drain on the practices resources, or are they actually generating real profits? How do I build a championship support team?
• What do I need to change?
• What about my existing clients – how do I explain to them that we are moving to a different remuneration basis – and how do I keep the ones I want to keep?
• None of my RIs will do it / I can’t afford to pay my RIs on this basis.
• How confident are you regarding fee levels?

IFAs also need to embrace technology for T&C and Compliance utilising various business tools and solutions. Tools that have built in audit trails will, in turn, reduce the burden on compliance and professional indemnity.

You need to get to grips with their ‘Investment Know How’; i.e.

• Understand Research and Fund Analysis
• Learn Asset Allocation and Portfolio Construction
• Demonstrate their expertise and add value to their core proposition.

IFAs must be paid for the work that they do, or at least operate on a less commission reliant basis; it is not simply substituting fees for commission. After all, this will just perpetuate the old model of cross subsidy that we are trying to move away from. We are not here entering the Fees versus Commission debate, that is something else entirely.

Fee-based means that the IFA practice in the future will have a whole basket of income streams, but unless that includes Fees, Fee Offset, Retainers, Fund Based, Renewal etc… then it is very difficult to see how that practice will survive, let alone thrive.

IFAs need to be in control of their own destiny; unless they are “truly Independent” they will always remain dependent on others thus creating a conflict of interest.

Furthermore IFAs need a clear defined service proposition that embraces:

• Business Proposition: Focusing on niche areas of expertise
• Training: That encompasses the whole practice from the Director/Manager level through to RIs, Para-Planners, Practice Managers etc…
• Marketing: Embarking on effective marketing strategy to attract the right clients who are profitable
• Developing strategic alliances with professional connections
• HR: Building a support team who are “profit focused”
• Technology: That will improve efficiency and streamline the business processes
• Professional Qualification: Ensuring the practice achieves the highest levels of professional qualifications

In summary we need to consider all these areas and review the business model holistically.

There are various models you can adopt. It’s better to be exposed to a number of varying different models from successful practices/practitioners large and small who have made the transformation and replicate a model that best suits your organisational style.

It does not matter which route you choose to take, it is simply a question of running a profitable operation that is more client focused and less dependable on commission income.

Embracing state of the art technology systems will enable you to run a smooth and efficient business, which will reduce operating costs and increase profitability hence the term:

‘Working Smarter not Harder!’

One thing is for sure - whatever strategy you embark upon, it will cost you time, money and you will make mistakes.

There are various professional organisations that will help you to achieve your business goals and objectives with the least minimal disruption, which in turn will save you time and money.

It is simply not a case of one-size fits all!

About Ash

With more than 20 years experience within the financial services sector, Ash has in depth understanding of the industry at all levels. He started in direct sales and than established his own IFA practice, Angel Mall Insurance Services, in Worcester. Following this he held several senior management positions within major Life businesses including Clerical Medical and Scottish Provident.

In 2001, Ash joined with fellow financial advice experts to launch Fee Based Advice, an organisation to offer training, marketing and IT systems support to IFAs offering a fee-based service to their clients. Fee Based Advice now has a national reach of IFA members and Ash plays an active and influential role in developing and managing member services.

The Fee Based Advice brand has become well known in the trade media and the company is now launching a consumer public relations campaign to educate consumers on the benefits of fee-based advice.