Industry Articles – Archive

It’s interesting to see the development of M&G Wealth, the takeover of the Prudential sales force, the acquisition of Ascentric,  the recent purchase of Sandringham and the statement that Sandringham will be acquiring other financial advisers. On paper the strategy looks sensible. But the history of institutions acquiring IFAs is pretty mixed to say the least. Why is this?I think one of the problems is that some institutions do their own due diligence. This is always a mistake. The provider decides to buy ‘distribution”. It took ages to come to this decision and many more months to find an attractive firm.  Finally they find one. “Thank God. We can buy them and the price is right!”

Meetings take place and the deal is done; subject to due diligence. The Distribution Director puts a team together; none of whom have ever done this work before. All they know is that their employer wants to buy this business; after all they have been trying to do a deal for almost a year and people are asking questions. So, they are conflicted. The last thing they want to do is tell their boss that they have concerns and they tend to play down any potential problems

By the way,  it looks to me that Quilter’s £35 million provision for DB to DC advice given by Lighthouse suggests that the due diligence on that transaction was imperfect. But even if due diligence is solid there are other challenges that arise when an institution acquires an IFA. Not least the culture clash.

Generally, the CEO of an advice business is an experienced manager but seldom experienced in working for an institution. The latter involves meetings, meetings and more meetings. This can be frustrating and time consuming. What’s more, when the transaction completes the CEO will realise that the risk appetite of the new owner is very different to a typical advice business. Health and Safety, Data Protection, Diversity, HR generally, Business Plan Resilience, IT Security,  etc. And, last but by no means least, Financial Conduct!

To be clear, I’m not suggesting that institutions should not be acquiring financial advice businesses. In fact, from a consumer perspective it might be a source of comfort that an institution rather than an owner managed business was looking after their investments. But, as one CEO of an acquired business explained to me: “I have millions in the bank but it’s a marriage of inconvenience”.

I wasn’t surprised to read that Scaleable Capital, one of the first “digital disruptors” in wealth management, has closed its direct UK retail wealth management business. Like all the other similar businesses it has failed to disrupt let alone make any money. But I was surprised to read that it was the largest player in the European market yet it had only attracted about £3bn, including B2B revenues. Talking about not making money; what about Nutmeg? Nutmeg was founded almost ten years ago and the last time I looked it had approaching £3bn and 100,00 customers on the platform  – note customers not clients. And, to its credit it has raised funding of £120m from well-established investors.  My recollection from back in the day was that Nick Hungerford, the founder and CEO, was clear that it could take time to generate profits. But I don’t think he suggested it could take more than twice the time as Amazon took to achieve this goal. So, where are they now? Their most recent published results are for 2019 and showed a staggering loss of £21m. As you will know, these losses have widened every year since inception. My guess is that at some stage some institutional players with existing customers might well consider stepping in and buying the platform as a swift way to gain traction with their own propositions. Maybe someone like Goldman Sachs, who already have 500,000 UK customers on Marcus, or J P Morgan who I understand are planning a UK launch in this space. Or maybe one of the existing shareholders.

Interestingly, digital wealth managers are still called “disruptors” but that is certainly not an appropriate description. In my opinion, apart from the FSA and FCA, the only disruptor in our market for the last twenty years is Transact which was, of course the first intermediary “wrap”platform. They disrupted life companies and fund managers; the latter seeing an exponential increase in passive funds given their ability for advisers to take fees from the platform. Their 2019 operating profit was about £46m and their market cap about £1.5bn. I think that if we ignore any in-house fund revenues and focus on platform fees, Transact has made more money than all of the institutional intermediary platforms put together. And I think that if we look at the development costs, including those platforms that did not see the light of day plus re-platforming costs and ongoing losses incurred, the industry has probably burned approaching £2bn so far.

In spite of these investments, the actual client experience of intermediary platforms hasn’t developed. In fact I understand that most clients don’t even look at their platform. Why should they? The few I’ve seen are not impressive. Perhaps it might be  time to  transform this experience  – especially  for later life clients. Why later life? Because many later life clients have more time to look at them and more risk on the table. And because later life is more complicated. At least mine is! When I was working I had one source of income. My income now includes: State pension, fees for a non-exec role, fees for some consulting, a KPMG DB pension, an EY DB pension, an annuity, royalties from my book “Dirty Money Terrible People” and SIPP drawdown payments. It would be useful to have these on my platform. That’s just basic.

How about a platform providing seamless access to other useful information such as regular household outgoings including insurance policies, utilities etc? And how about the platform messaging clients a month or so before renewal and recommend a replacement or continue with the incumbent.  And if savings were on the platform perhaps it could remind clients that the end of a fixed term deposit was approaching provide recommendations regarding a replacement? It could also send information relating to investment markets tax changes etc – all of this branded to the firm. Obviously, such a proposition would require some outsourcing but could also generate some revenues such as split commissions with organisations such as Go Compare or MoneySuperMarket which focus on this kind or service. And it might seem a lot of effort for minimum return. However, for a widow or a widower where the other party used to look after all of these issues it could be a Godsend and it could also generate some valuable referrals

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I took part in a very interesting research project a while ago and I was fascinated by the online feedback presentation. It was based on online interviews with over 100 leaders (and me!) from the United States, Asia-Pacific and Europe representing large and small businesses and a wide range of sectors including financial services and some companies with which you will be very familiar. The consultants involved were Ibis Ideas and their premise was that: “Organisations that will survive and prosper are those that are capable of developing – and then harnessing – fresh thinking.” They described these companies as Ideas Led Organisations (ILOs). And they concluded that every business – from the most obviously “innovative” to the relentlessly traditional – could benefit from building a culture where good ideas, and the people that develop and deliver them, flourish. So, what does such a firm look like? Does it look like yours?

Needless to say, in ILOs, ideas are valued. Fresh thinking is part of everybody’s job and staff are rewarded for their contribution. Ideas are generated by individuals and teams that can bring diversity of thought and experience to solving problems. ILOs also ensure that fair systems are in place to make sure good ideas emerge, free from politics or undue influence. I have to say that this point resonated with me as I have witnessed ideas being crushed by the senior person in the room on countless occasions during my years as a consultant. Looking back to my time in the industry I think I may have been one of those people. Actually, I know I was! ILOs also nurture and then activate great ideas and ensure they are well run to deliver long-lasting viability.

In the Ibis Ideas research every ILO they encountered had a clear, well-understood sense of purpose. They knew why the exist. I believe this is inherent in most of the businesses in our sector. It is very important. And it leads to the ability to develop and realise ideas, not just for the business but for clients and business partners. Culture was seen as a key issue. One CEO said: “The one thing you can’t reinvent in a crisis is your culture. Invest in that now”. Given the current pandemic, “now” might be too late! Many leaders commented that it was very important that the most senior individuals and teams “walked the walk” on ideas and led by example. Where ideas are highly prized and celebrated by directors, people are more likely to contribute. And staff at every level have to feel comfortable offering ideas. In an ILO, every leader and manager must ensure that they extinguish the risk of individuals being, or even feeling humiliated, for putting their ideas forward.

“Those who are not nimble will be praying that they can get away with it” responded one CEO.  Agility enables both the pursuit and delivery of ideas. And leaders were clear that while smaller organisations, could in theory be more agile, this isn’t always the case. I guess it depends on relative size. In my experience very few product, fund or platform providers are nimble unless their backs are to the wall whereas most financial advice firms are very nimble indeed. And, of course, they have clients rather than customers so they get constant reliable input as to what needs to change. Importantly, ILOs are bold. They recognise that the best new ideas might kill aspects of their existing business models but they make them happen anyway. However, some leaders shared their frustration that organisational timidity prevented them activating an opportunity and then seeing it realised by a competitor. ILOs are also comfortable with sharing information and have a culture of maximum transparency. And leaders are bold when providing feedback and manage performance effectively – dispensing quickly with anyone that does not pull their weight.

Leaders of ILOs could not have been clearer in believing that everyone in the organisation must feel they have a common interest. A kind of “We are all in this together” feeling. They work hard to ensure that every employee feels a kinship, not just with organisation but also with each other. An “esprit de corps” if you like.  I guess we have all been there. You know it when you see it or feel it.  And you know when it isn’t there.

Finally, and in my opinion perhaps most important, ILOs never, ever, let themselves get too comfortable!

This is a story that I guess will be familiar to many financial advisers. But I thought it might be useful to show to some clients who keep putting-off taking out an LPA; or maybe just to remind us how important these documents can be. It was written by a colleague of my wife and it certainly struck a chord with me when I read it a couple of weeks ago.

“This is cautionary tale. I hope it is helpful. Even those who’ve heard of a lasting power of attorney (LPA) often put it into the back of their mind. Of course, you will get round to it. Not just yet. Personally, I had never heard of it when I needed it. Now it’s too late. My husband has early-onset dementia and had already lost his mental capacity and so could not authorise anything legally binding. He has an aggressive type of dementia which typically affects people in their fifties and beyond. In a couple of years, he changed from someone running a successful company to someone who was eventually detained under the Mental Health Act and is still in a secure hospital.

We had maintained separate bank accounts through our married life and I had no access to his accounts; a bit tricky as I had given up working a while ago and wasn’t eligible for my own occupational pension. I was able to pay for a few months’ care fees from my “slush fund” and began the long haul of applying to the Court of Protection for an order to take decisions on my husband’s behalf. You apply to the court via series of forms which are supposedly easy enough for a layman to complete. However, I have to say that despite my professional experience and two degrees I found them pretty difficult and ended up having to engage legal help. The slush fund was looking pretty sick at this point and I also had to pay upfront for the Court to look at my application. I sold my car to raise more funds.

It took nearly a year for even an interim decision to come through; by which time I was at my financial wits end, still applying for jobs and borrowing from family to keep the ship afloat. I had asked for the power to determine my husband’s health and welfare needs. It took nearly a year and was refused point blank. And my husband is still effectively a ward of the state today. The court’s interim ‘minded to’ letter also said that I would only be able to manage his finances if I appointed a second ‘professional’ deputy to help me take decisions   – a person which I would have to fund. I was appalled by this and responded by giving details of my financial experience, whereupon the judge backed down and the court order came through. I had just one month’s care fees left in my back pocket.

The year running up to the court’s decision was a perfect storm. Coping with my husband’s ill health, navigating the labyrinthine care system, finding a care home prepared to take him, then the home finding him too challenging (which they eventually did with one day’s notice on a Bank Holiday) and all the time dealing with the court and a precarious financial situation.

Even now, I have to account to the Court of Protection and respond to their questions and pay them a fee to supervise me and read my reports. I also have had to take out a mandatory insurance policy in case I decide to take off with all his money. I understand why all this rigour is required but it’s pretty hard when it relates to someone you love and to whom you have been married for over forty years. By contrast choosing to do an LPA is easy peasy and for most people costs a mere £82 and can be done online.”

The financial advice profession comes in for quite a lot of criticism; some of it fair, some of it less so. At the moment there seem to be many articles talking about fees. But how do you put a price on the suggestion or  the insistence that a client takes out an LPA? Seems to me it is priceless.

I was reading Private Eye a few weeks ago and I noticed an advertisement for Bancroft Wealth. The headline was: “IT’S SIMPLY NOT POSSIBLE FOR AN ADVISER TO CHARGE JUST £ 500 PER YEAR!” “One of our competitors”

It sounded like an interesting proposition; albeit one that I thought would be challenging to execute profitably. But their website is impressive and worth a look. They are not a “Robo-adviser”, they are not vertically integrated, they have fully qualified IFAs and they are looking to become a Chartered firm. However, they only communicate with clients on the ‘phone and/or video. The very next day I noticed an advertisement for Schroders’ Personal Wealth proposition. I had a look at their website as well. Congratulations to them: They include a calculator which is the first of its kind I have seen. It demonstrates initial advice costs, on-going advice costs and investment costs broken down by platform, DFM and mutual fund fees. Both Bancroft and Schroders Personal Wealth are relatively new entrants to the IFA sector. They are both offering the services that one would expect from a regulated financial adviser. The difference is the cost of the advice. And it is very significant

The advice fees for the Bancroft proposition including initial and on-going advice are £500 per annum, irrespective of the amount invested. In order to compare, I entered £1.5million into the Schroder IFA client fee calculator; looking for, say, £40k pa drawdown net of tax. The initial advice fee was about £21K and the ongoing advice fee about £8,000 pa. An investor using Bancroft IFA to advise on a portfolio of £1.5 million would pay £500 in year one and £500 thereafter. To be clear, I am not suggesting that the Schroders Personal Wealth pricing model is out of line with the market. And, of course, they have a well-established brand with hundreds of years of history and actual face to face meetings. But with Bancroft IFA we are looking at £500 as opposed to £29,000 in year one. And a saving of £7,500pa going forward. That is enough for another pretty decent holiday every year!

I’m sure principals of successful IFA firms reading this will have their eyebrows raised and think: “Yeah? How long will Bancroft survive?” Fair enough. If I had looked at their proposition six months ago I would have been very sceptical. But if the capital is available to fund the initial advice process I think this model might work for a significant number of clients and create profitable IFA businesses. Not least because “lockdown” has created an exponential increase in the way that the 50+ demographic use online video communication. And online means that this £3trn asset rich demographic can now “look the adviser in the eye” without visiting the office and view screen sharing to actually understand cash-flow modelling and so on.

As far as I am aware, none of the “Robo-advisers” have achieved profitability and some of them have been around for a long time. But Bancroft IFA is nothing like that. It is a very streamlined IFA model with 2020 people, processes and technology. For example, I understand that they have two para-planners for each IFA whereas conventional models have one para-planner for a number of IFAs.  And, in any event; how much time on-line is needed to carry out an initial meeting when a client has completed an online fact find and some initial analysis has already been carried out? And how long does a review have to take when the IFA is presented with all the data and information needed for the meeting? Of course, the answer is” “It depends” But I guess that for many clients not much changes in a typical six months. And I’m sure there are many clients who would find a quick catch-up for fifteen minutes or so to be adequate most of the time. The problem is that for one reason or another physical face to face meetings are never fixed for fifteen minutes. In my experience it is usually at least an hour and involves travel time

I contacted Bancroft. They said: “We worked hard to find the sweet spot for a completely transparent, flat annual fee, where we make money without our investors losing out. High quality, qualified advice isn’t free, but nor should it be priced at the expense of investors’ returns.” As we all know, professional relationships are about value rather than price, but It seems to me that flat fee models like this may well appeal to a significant number of investors in future.