Independent Financial Advisers (IFAs) have a promising, if demanding, future across the range of financial services products.

Key Note expects considerable changes in the sector, as a result of government legislation. The technological revolution will have more impact on the backroom competitiveness of IFAs, than on their market, because of their competitive advantage in face-to-face dealing.

Fierce competition is expected from de-polarised financial services companies, as company agents and tied agents lose market share to financial supermarket operations and to IFAs.

• IFAs have achieved a major market share in the distribution of many financial products.
• They have been increasingly regulated over the last decade, while the qualifications they are required to obtain, and to keep up to date, are stringent and rigorous.
• The next few years will see even more tightening of controls as the Financial Services Authority (FSA) takes over all regulatory activity in the financial services industry. The Personal Investment Authority’s (PIA) monitoring role will be developed and more IFAs will be tested externally and required to retrain or leave the marketplace.
• The new Financial Markets and Service Act, not yet finalised or enacted, will lead to a revolutionary change in the distribution of financial products, allowing major financial services companies to offer a range of different companies’ products in competition with IFAs.
• The polarisation regime, which began in 1987, allowed IFAs to flourish because they were more trusted than tied agents.
• IFAs will have to form networks if they are to compete with the technology and economies of scale enjoyed by the large companies.
• The distribution of insurance products has been increasingly dominated by independent intermediaries, however small the margin.
• The abolition of polarisation will increase the share of bancassurers in the market but the dominant position of IFAs is unlikely to be seriously challenged within 5 years. General insurance is likely to be less affected than life insurance.
• The introduction of new technology is likely to penalise small IFAs who lack the capital to invest in computer equipment and services, so the number of firms is likely to shrink rapidly, but networks will continue to grow. In due course, there may be a very few, very large, networks supported by sophisticated databases including all types of product and most providers.
• IFAs dominate in most of the general unit trust, OEIC (open-ended investment company) and investment trust sectors where individual investors are involved. Given the increasing complexity of these products, the increasing variety and high levels of risk, IFAs are more likely to dominate in the next few years than fund supermarkets, which will remain the preserve of the rich.
• In pensions, IFAs already have a major presence in personal pensions, which investors see as a very complex area and one where trust is important. The introduction of stakeholder pensions and the second state pension is likely to increase demand for IFA advice among the affluent and financially literate, while the less affluent and less literate may continue to let opportunities to invest pass them by.

Key Note interviewed 990 consumers and discovered that they would most like to use a traditional financial service provider, provided a wide range of products from competing companies could be bought.

• A sizeable minority rely on family for advice, while a quarter had turned to IFAs already.
• Many would go to an IFA for advice about life insurance, or about a mortgage.
• Few would consult an IFA about stakeholder pensions or use the Internet for financial advice.
• Use of an IFA is concentrated on the affluent, young middle-aged person from the South. Young people and the elderly tend not to use IFAs.
• Repeat use of an IFA was quite high but a considerable proportion would not return to one in the future.
• For the future, Key Note believes that the position of the IFA is assured, given a stable economy, and that they will develop, like the rest of the financial services sector, as the mass wealthy sector grows.
• The introduction of new products and services aimed at the poorer groups will not lead to more business for IFAs, because most people will not be prepared to pay the fees required. However, insofar as these products are exploited by the affluent, IFAs will offer them.