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‘Small adviser firm owners sitting on a time bomb that’s about to go off’

Regulator and clients will want bare a minimum from firms providing them with financial and investment advice, which increasingly small businesses will not be able to deliver, warns Attivo Group CEO Stephen Harper

“I would not want to be running a small directly regulated firm today because the environment we have from the regulatory, legislative and market perspectives, is incredibly different from what it was just two to three years ago,” says Stephen Harper, CEO of Cheltenham-based Attivo Group.

Attivo Group’s 2015 figures show turnover has increase 47% in the year and and the net profit grew 150% through a strategy of organic growth and acquisition (see figures at end of article). Harper believes that over the next few years small firms are going to find it increasingly difficult to operate in a market which is being driven towards higher professional and business standards and where the Regulator, consumers and PI companies will expect financial advice to have moved from its cottage industry roots to having more corporate business structures.

“I think there are many advisers in the industry who are under the illusion that they run a business – they don’t. They’re actually running a time bomb that’s about to go off,” Harper says. “Let’s be clear, the Regulator does not want small businesses in this market. Actually, clients don’t want small businesses. Because as one individual running an adviser firm in the modern world, I can’t possibly deliver all the things that my wealthy and sophisticated clients need without a robust team around me and the processes and the technology to provide the right support.

“How can an IFA with no research capability, no investment qualifications and no analyst or support staff manage anything more for a client than a £50,000 portfolio? With all the market volatility we’ve seen over the past decade or so you’ve got to have discretionary permissions.

“Nowadays, if I were a client I’d want my advice firm to be, at a bare minimum, chartered, independent, a pension transfer specialist, and to have a proper business structure and a robust and sophisticated investment proposition. That discounts a high percentage of the industry.”

Small business risk

Harper believes it is “a myth” that an adviser firms will continue to be able to operate as a directly authorised business when turning over one or two hundred thousand pounds a year. “You’re vulnerable and that makes your clients vulnerable,” he says.

“If you have an advisory business with two or three chartered or certified financial advisers as bare minimum, supported by three or four paraplanners and administrators, with a specialism, for example covering investment, pension transfer, tax and trusts, which outsources its investment proposition and is turning over £1m-£2m a year, that could be a robust advisory firm. But it is still small and I wouldn’t want to be in that environment as you are heavily reliant on a few people. You only need one person to be on long-term sick or to leave and your business is exposed.”

That risk is going to play into the professional indemnity insurance (PI) market, he believes. With fewer and fewer insurance companies willing to offer PI and as the market changes, placing an ever greater emphasis on professionalism and having a proper business structure, Harper sees smaller entities struggling to obtain cover.

“We’re already seeing this in the firms we’re acquiring. We bought a company recently where as a directly regulated firm the principal could not get PI; he had no choice but to go out of business.”

One-man-band operations he feels place too much responsibility in the hands of one person in a market where the pressure is for advisory firms to become larger, more corporate entities. “A one-man-band handling £25million in assets, with a diploma qualified paraplanner and two admin staff has to be the managing director, the financial director, the compliance director, the total financial planning team, and the chief investment officer. How can you be the adviser and the compliance director and money-laundering officer? You’re not going to blow the whistle on yourself, are you?

“You can employ an external compliance consultant but will they challenge you like an in-house compliance director would? If you are a firm of three partners, are two partners really going to challenge the third? You get stale; you get bad habits because no-one challenges you.

“I believe the regulator should come out and demand a proper corporate structure in every directly regulated IFA – so there is a full-time compliance director, there is a full-time finance director, a chief investment officer and someone dedicated to a pensions director role.”

Harper also believes making Diploma level the minimum qualification for advisers was set too low if financial advice is to be seen as a profession.

“I think the FCA should come out and say chartered is the minimum to be an adviser. Diploma is barely A-Level, and yet we expect people to trust £500,000 or more of their money to someone with that level of qualification.”

Change in firms looking for acquisition

Attivo has an active acquisition strategy to buy firms that are the right fit for Attivo’s culture, Harper says. “Typically, the kind of businesses we have been looking at are small, directly regulated firms that may have up to £60m or more in assets under management, they are not businesses that have a growth model, they are very much about client retention.”

Reinforcing his warning, what he has noticed, he adds, is that the size and type of adviser firm approaching Attivo for possible acquisition has changed in the past year or so. “When RDR happened the people coming to us didn’t have the right qualifications or just wanted out of the industry. Now, we’re getting owners of £1-2m a year turnover businesses, with three or four partners, coming to us saying they’d like an exit because they have realised the modern advice environment is both challenging and scary. I think that says it all.”

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Attivo facts and figures

Assets advised on:                £340m

Funds under influence:          £500m

Net profit 2014/15:                 £360k (up 150% previous year)

Turnover 2014/15:                  £5.78m (up 47% on previous year)

Target FUI for end 2016:        £1bn

Source: Attivo Group

Listen to our podcast interview with Stephen Harper

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