One in 10 IFA firms unlikely to survive recession

A recent report into the UK IFA market published by Plimsoll rated 118 of the UK's leading 1,000 IFA companies as being in financial danger.

Out of those 118 firms, the report found that 38 increased their debts last year as a means of propping up their businesses. However, for many this practice started to become an issue up to three years ago.

In addition, 92 firms saw profits fall in 2008 and 71 companies consistently lost money. These firms' costs were far ahead of sales, with the firms failing to respond to changes in their business structure.

Some 38 of the 118 firms are traditionally considered 'well established', having been set up over 10 years ago. However, as they are failing to adapt to the modern advice market, they are falling behind their competitors as a result.

Yet senior analyst at Plimsoll David Pattison questions whether it would be best for the financial advisory market to allow these firms to fail.

"There is no doubt in my mind that recessions catch bad businesses out.

"Those companies that have entered this period ill-prepared have placed themselves at a distinct disadvantage. Many have grown used to running their businesses on high risk business models, propped up largely on finance.

"It is clear that many of these 118 'danger' businesses are fundamentally poor, aggressive or disruptive and are unhelpful to the market. With newly prudent banking systems in place, raising quick finance will not paper over the cracks as it once did."

The recent research highlighted the current overcapacity within the UK IFA sector. Thirty-three per cent of businesses suffered a fall in sales last year, with competitive pressure forcing many firms' sales to fall by 14 per cent.

Pattison said: "The reality is, for many of these 118 danger businesses, their problems go back years, certainly long before the current UK slow down, yet they have failed to fix their problems.

"Darwin, in his work, The Origin of Species, recognised that extinction was an integral part of evolution, survival going to those most responsive to change.

"Our analysis is clear, not all of these 118 businesses will survive. Of those who do, very few will be in their current shape and many will be in the hands of new owners.

"This further supports the argument that despite the obvious tragedy of job losses, livelihoods lost and the pain of a business in decline this period is inevitable and can only be good news for the market in the long run."