IFAs, profitability and sustainability
New research from Plimsoll Publishing suggests that around one-third of IFA firms are making an ‘unsustainable’ loss as a result of ever increasing costs.
The report also found that the average profit margin for UK IFA firms has fallen to 7% over the past couple of years.
The research looked at the profitability of 1,000 firms across the UK, with 293 of these having made a trading loss.
Of these loss-making firms, 148 firms were in the red for the second year running.
There are several important conclusions to draw from this research.
It is often said that “a poor Financial Planner is a poor Financial Planner”. For IFA firms to run their businesses at a loss is a useful indicator of their financial planning and business management skills.
It should prompt clients to consider just how skilled the management of the firm really are if they are unable to run a profitable business.
In our experience, IFA firms who are habitually loss-making are often in this position because they are chasing an unsustainable growth strategy and they do not price their services with long-term profitability in mind.
If an IFA firm is making a loss in consecutive trading periods, clients of that firm need to question the likely longevity of that firm. This can have consequences when it comes to the continuity of advice and service.
Getting in financial difficulty can also influence the behaviour of IFA firms.
One of the reasons why the Financial Services Authority (FSA) has a Fit & Proper Person test is to ensure that approved persons in retail financial services are solvent and not chasing big commission payments in order to keep their creditors happy.
Checking the accounts of your IFA is an important step in the due diligence process for every investor.
Photo credit: Flickr/Philippe Put