How IFA Firms Can Scale Without Losing Compliance Control

The best thing about our industry

You can make a lot of money in retail financial services. No factory costs, no heavy R&D spend, patents are unheard of, and with a few relatively straightforward exams you can rise or fall by your own efforts.

The biggest single life insurance policy ever sold was in 1990 by Abbey Life’s Peter Rosengard for $100m of cover on the keyman David Geffen, during the M&A boom in the USA. Peter noticed that Geffen’s music business was being sold to MCA Records, with almost no fixed assets attaching – the asset was just people, and people need insuring just the same as buildings and contents.

You can rise very quickly in this industry. A quick look at the top ten firms in retail financial services shows just how the names change. You have to ignore top dog SJP, who dominate with nearly 5,000 advisers and a unique business model that no one can copy. All other firms have a business model that can be replicated with the right people, and the list is completely different every five years.

The sector is dynamic, and 100% growth is not difficult. Perhaps that is what entices the private equity-driven consolidation industry.

So how do you scale up?

Growth in our industry has no secrets. Right now the big growth area is academies, and monetising the legion of people who want to get into our industry.

Most start as mortgage brokers in an industry that is very difficult to automate. You really do have to know your way around the market to place a tricky mortgage, and when dealing with people and UK property, it seems almost every case is tricky in some way.

Can this easily be automated into a DIY model? I doubt it. The UK property market is complexity built on complexity. In many countries, by comparison, you can arrange a BACS transfer at the lawyer’s office and collect the deeds on the same visit.

And people are complicated too. For a completely automated mortgage market, lenders would need to publicly declare every single nuance on the type of borrower and property they accept and how. Do that and you put a target on your back, as the consumer starts to game the system.

But you do not need infrastructure in retail financial services to start your growth journey. Compare our world to the primary and secondary industries of mining and manufacturing. Fixed costs such as land and buildings are almost unheard of. No machinery costs and no depreciation.

You do need a services infrastructure, but the upfront costs are mostly deferred, and often measurable in time, not cash. More detail to follow, but for now, you need a bank account, an FCA licence (or network franchise such as an AR licence), regulatory capital of just £5k for mortgage brokers and some Professional Indemnity Insurance. Other costs come later, but in the immediate future you can push those into running costs.

Regulation creates barriers to entry

The best thing about our industry is that the market is protected by barriers to entry – regulation – and competition is therefore limited.

In the go-go years of the early 1990s you could almost guarantee that your clients would be called up by other brokers on a regular basis. Keep your clients close, they said, in case you lose them to the competition.

Today we must thank the regulator for keeping the industry stable and secure, and short on competition. That brings its own problems, of course, but every business should welcome regulation that creates a barrier to entry, raises standards and is paid for by willing customers.

There is almost no VAT in our industry

Many advisers seem unaware of the advantages of operating in a VAT-free environment. No quarterly returns! Almost no IFAs are registered for VAT, and in some ways this is to their loss, as many costs could be defrayed and reclaimed for firms that charge VAT on services that may be vatable, for instance “generic advice” and advice that does not lead to the bringing together of two parties.

There is almost no credit risk in retail financial services

Bigger still is the almost total lack of credit risk. Since the commissions and fee rebates are almost all paid by ancient monolith providers, there is almost never a default. Compare that to a business where you have to chase each client for their cash.

The worst thing about our industry

Retail financial services is a business that can scale fast. But it comes with downsides too. The most complained about is the regulation. Ironic, that one.

It introduces some elements that are not natural human instincts. You get bureaucracy, and the industry of showing compliance, which is a whole extra mile on from actual compliance.

Each case must be clearly documented with a five-year horizon in mind. What will this look like in five years’ time, looking back on today?

So standards rise almost without limit, and that brings a serious drag on cost. Cost in time spent per adviser, documenting visits and verifying ID. Costs in regulatory capital, in PI, and in systems and controls. They are variable costs that can be taken on as you grow, but they remain.

The biggest upfront cost is getting an FCA licence. This can take six months to a year today, and involves forensic examination of standards and procedures even before you have sold a single policy.

Counterparty regulation

Counterparty regulation comes into play here. For instance, banks will not provide accounts for firms who are in the process of applying for a licence. Once approved you can try again, so they say.

Even after getting the licence, each supplier, life office, fund manager, building society and bank will conduct their own due diligence on the new start, so that they too can prove their zeal to the regulator.

And I’ve been on the receiving end of the FCA here. Believe me – they want providers to show evidence of firms and individuals being thrown off panels, rejected, disciplined and so on. Gone are the days of the polite phone call suggesting you look somewhere else, or the non-reply. Welcome to the formal notice of rejection.

If you are starting out, keeping your morale up is key – we see a lot of these enquiries making their way towards our compliance support operation, IFAC.

“Everything’s fine until it isn’t fine”

Six words that neatly summarise our relationships in financial services. Without an end product to be seen, handled, put on display or otherwise evaluated, it is a world of numbers, trust and mistrust, good and bad feelings.

When things go wrong in the advice world, it undermines literally everything and usually you cannot put it back together again. You are running a china shop.

I ran a discretionary fund management operation very successfully, but during one nightmare one-month period we were unable to verify our system-produced valuations externally. The sneaky thing to do would have been to keep quiet about it to the customers while it worked through.

Instead we took the honest – and correct – route of informing all. In the end we reconciled correctly with the custodian and emerged from the storm. No one lost money, but the lack of certainty led to many sleepless nights, and one large customer removed all funds with immediate effect.

I don’t blame them, but it was a hard way to learn a lesson.

The path to growth

So how do you grow in financial services? First of all, you need an appetite for risk.

I don’t mean the sort of risk that the FCA is talking about, which will populate your risk register and be measured against mitigation items. I mean the risk of failure.

I am astounded by how few are really ready to step up. Time and again in various trades I ask: why not scale up? The same answer resonates: I wouldn’t want the hassle.

Only a very rare person is prepared to lie awake at night imprisoned with worry and what Field Marshal Sir John French, 1st Earl of Ypres, called “a lifetime of vicissitudes” in his memoir of 1914.

Set the TAP

The second key requirement is to set the tone of the venture. What is the tune your firm will play to?

The role of the CEO is hard to define, but I define it with just three letters: TAP.

You need to set the tone, set the agenda and start recruiting the people. If building scale, it is advisable to get the business working profitably at a small scale before putting your foot on the accelerator.

Plans are necessary

Plans do not survive contact with the enemy, says the legendary German military strategist Von Moltke. I prefer the more subtle observation from General Eisenhower about the D-Day landings: “Plans are worthless, but planning is everything.”

In financial services, you need the plan to show to counterparties. So it is best to write out the numbers today, get the spreadsheet ready, pump in the formulas for growth, and pull the cells across. Add some pretty text, and you have a plan.

It’s a fantastic process to follow, and always a wonder to look back on in years to come. Most of my own plans have been massively surpassed over a five-year period, beyond my wildest dreams. But in the first year or so? A painful process of disappointment aligned with exhaustion.

Luckily today, there are countless applications to help create the budgets and plans. Get the key structural pillars in place and get it out there.

Recruitment, people and delegation

Now comes the fun bit. In financial services, it is a people game. You had better like people, otherwise you’re going to give up.

In my early career as a life salesman, I was literally awful – and routinely came home in tears after missing my targets. “Anyone can learn how to sell,” they all said, but somehow it seemed to take me a lot longer to find my niche, my method, than anyone else.

The only thing I had going for me is that I stuck with it. One day I looked around the office and realised that despite my dismal figures, I was the most experienced in the office. Time to leave, I thought, remembering that old adage: if you’re the smartest person in the room, then you’re in the wrong room.

I quickly found myself in the world of the independent. In fact, on day one, as an independent working from home, I was phoned by two old friends with the opening line, “Now that you are independent, can you help us?”

It was an extraordinary experience to be interviewed by a network principal who calmly told me that I would treble my earnings in year one. In fact, they rose by a factor of five. For the first time I could sit alongside the customer and help them choose from the whole market, instead of trying to sell a product from one life insurance company.

Finally, I had found my niche: work with the customer to find a solution.

Recruit like-minded people

When the model is profitable, you simply need to recruit like-minded people to help. You have to dig deep to pay them, and I quickly found out that there are two types of employee: those that bring business, and those that bring problems.

I could never understand why my second secretary managed to do stuff in about 25% of the time of the previous one. “You can’t possibly have done it in that time?” I would announce. Of course, my first two hires covered exactly both extreme types.

Sometimes in life there is only one way to learn, and it’s the hard way. Nothing beats experience.

The three S’s

A common concern relates to the type of people a firm should hire. I worked on a simple metric of the three S’s – Simple, Sincere and Straightforward.

It assumes competence, of course, but those three served me well. In fact, all the HR lessons about diversity, not recruiting in your own image, and trying to get a balanced mix of people fell away over my career.

I once sat next to the explorer Sir Ranulph Fiennes at a pre-funeral lunch of a mutual friend. What type of person do you choose to come with you on your expeditions? I expected a long list of attributes, from endurance and skill to perseverance – a bit like selecting for the SAS.

Instead, he reminded us that you must spend three months in a tent with this person – so you had really better like them as people.

Now I use that same template, without guilt, for recruitment. They can learn and adapt and change. Things will go wrong at some stage, so best of all you like them, and trust them.

The most fundamental point: delegate

So, we are going off topic now, when really we want to know about scaling up an organisation in financial services. The most fundamental point here is to delegate.

If you feel unable to delegate, then you’ve either got the wrong people, or you’re not suited to scaling up. Because scaling up means trusting others.

Culture before incentives

In relation to incentives, I have never had much success here. I tried both share options and bonuses tied to targets, but as soon as you put out a target, you get people gaming the system to manage their target.

It seems to me that culture comes first, and getting the right people, with the right tone and agenda, trumps all else.

So, in BATSOFT we made all staff shareholders, and leave the rest to luck. I think they are aligned, but there is no sure measure against the alternatives. Employees think differently to owners.

The core of the business: systems

So now we come to the core of the business – systems.

Financial services compliance software is required. You need a way of doing things, and that should be tied to systems and procedures. You can write all the procedures you like, but it must be tied to a system.

So, for training and competence, you simply say, “go into BAT, and take the relevant exam”. The system should do the rest for you, and in your next staff 1-2-1, you can read through their breach register to find the list of exams passed and failed, time spent on each training module, and the staff CPD is available for future inspection.

The most common error made by SMF16s and T&C managers is to allow the individuals to keep their own CPD and inspect that inventory. When they’ve gone, they take that with them.

And the professional standards bodies expect individuals to keep their own CPD, but the regulators, quite rightly, expect the firm to have open access to the same.

File checking in the same system

In BAT we use the same system for file checking. An automated request for a file check is made, and results of the check by AI are available for all to see, with appropriate metrics around the long-term improvement, or otherwise, of the files submitted.

You, in compliance, have access to the individual new business book – which is technology-neutral – and can view the compliance dashboard.

What financial services compliance software should show

BAT – and in fact any financial services compliance software – gives you configurable results under the following headings:

Audit points under each section are available in BAT, from data protection to vulnerable clients, TCF, stability and so on. BAT also churns out regulatory data for FCA reports, and all the AI statistics on AI file checking.

Without this sort of insight, you’re into spreadsheets, and the time spent producing those, collating information and packaging it up for third parties to view.

Every time you amend a spreadsheet, you should have a record of what has been changed, meaning a previous copy of that same spreadsheet. You can see them expanding at an exponential rate.

Put simply, Excel will let you move to managing 5–10 RIs. But to go beyond the magic number of 10, you need financial services compliance software.

Standardisation and managing by exception

Once you have the technology installed, then you can set about standardisation of processes with the advisers.

Famously tied to their own procedures, the single most requested item in our BAT financial services compliance software has been, and remains: can we configure our own FF?

I find this a laughable point. I mean, do you have nothing else to worry about than the design of a blank form? Well, it seems so, and we do what our customers ask for – so the BAT financial services compliance software FF is configurable.

Manage by exception

Technology and systems enable you to manage by exception. The key is to pull out of the ranks any individual who stands out.

So, you get the metrics by firm, compare the individuals against each other, and pull up any obvious exceptions. You have your own minimum standards, and that is configurable too.

You cannot get growth without technology in your business. Most mortgage brokers have at least ten systems, and IFAs closer to 15.

I can recommend a simple register of IT so that you have a central record of what you are using. Starting with email and WhatsApp, you move to quoting systems, CRMs, and more.

It’s all there in the mix, and you need to rate them, compare them, examine them for risk and data security. Extract the costs, pain points, and rate them.

Do that on a regular basis – it is an interesting measure. Tech, and associated costs, has got legs.

Scaling without losing control

So that is scaling up, keeping control and expanding in a nutshell.

Above all, numbers do not let the business lie to itself.

The business that lies to itself and listens to its own lies cannot see the truth. Without the truth at hand, the business will die.