Do conflicts cloud platform share schemes?
True Potential’s new share deal for advisers has reignited debate on the potential conflicts of interest that have to be managed as part of such arrangements.
TP’s share plan will give advisers an escalating level of shares depending on the amount of assets placed on the platform by February 2013, with a 50 per cent uplift on assets placed by March 20, 2012. The deal will be backdated to take account of any assets placed on the platform since it launched in March 2011.
In its platform consultation paper from November 2010, the FSA made clear it was keeping a close eye on adviser shareownership models. It said: “We recognise there are a number of valid concerns with regard to ownership issues of advisers. We expect firms to take steps to manage this conflict and this will be an area we will continue to monitor closely.”
Speaking at an event in October, FSA conduct and risk division supervisor Rory Percival said the regulator was not looking to prevent such models as long as potential conflicts are managed.
But he did highlight that some white-labelled arrangements were unlikely to be allowed when the adviser-charging rules come into force next year. He said: “The rules clearly prevent an advisory firm white-labelling a platform and sharing revenues generated through advised business being placed on the platform. I make this point very clearly as we see firms introducing revenue-sharing arrangements now that apparently will be in breach of adviser-charging rules in 2013.”
Threesixty managing director Phil Young says: “I think the conflict of interest is there for people to see with deals like this from True Potential and it may well be the regulator looks across them and stops it for everybody because of that.”
But True Potential senior partner Daniel Harrison (pictured) says there is nothing wrong with advisers being part of a partnership model which includes share incentives. He says: “True Potential LLP has had a value-sharing scheme since it began business. All we have done lately is extend the scheme and given it a renewed focus. If people want to use a partnership model to create value for clients, then they need to be aware of any potential conflict of interest issue that may arise and manage it.”
Platforms such as Ascentric, Transact and Novia all had adviser share schemes at launch to encourage adviser participation.
Ascentric stopped its scheme in 2008 but between 5 and 10 per cent of the business is owned by advisers through share options. Managing director Hugo Thorman says there are no problem with schemes as long as advisers can prove they have carried out due diligence. He says: “Ascentric has offered shares to advisers in the past but stopped when the FSA began to make noises about there being conflicts of interest. The big test in the case of True Potential would be how many advisers switch assets from one platform to another and the difference in price bet-ween the old and new platform.”
Transact had a share deal when it was set up in 2000, which was brought to an end in 2008. Advisers currently hold just under 14 per cent of the company.
Managing director Ian Taylor says: “I think it is more difficult to use these shareholding deals purely because of how closely the FSA looks at conflict of interest but there is nothing to stop advisers buying shares in such firms without being awarded them.”
Novia ran a share options’ offering for advisers which lasted less than 12 months after its launch in early 2009.
Chief executive Bill Vasilieff says: “We only have between 1 and 2 per cent of the firm’s share options held by advisers. Many felt the conflict of interest was too apparent. As a firm, however, Novia did not see anything wrong with the deal as long as everything is disclosed to the client.”
Nucleus chief executive David Ferguson says share arrangements can be a sensible move for advisers looking to mitigate execution risk by investing in the platforms they use most and the schemes enable them to have a say in a platform’s direction. Nucleus is 51 per cent owned by advisers.
He says: “Given the way life companies are inclined to behave and the propensity of some participants to leave the market when they cannot make it work, it is vital that IFAs have a meaningful say in the direction of platform operators. There is only a conflict if you are of a pre-RDR mindset.”
IFA group Paradigm announced it was to become a shareholder in Nucleus in September. Nucleus currently powers Paradigm’s platform.
The Platforum managing director Holly Mackay says advisers should scrutinise the return they may get in the event of a sale after some advisers in Australia did not see the return they expected.
She says: “This model was popular in Australia but when the businesses came to be sold, there was outrage from the advisers who were unpleasantly surprised at how little the payout was, so I think the first thing to question is how much of an incentive these schemes are likely to represent.”
Platform adviser share schemes
Launched in 2006, around 95 firms hold the majority stake of 51 per cent in the company while Sanlam UK holds around 42 per cent. Firm is expecting to report a profit for 2012.
Ran shareholding deal with advisers from its inception in 2007 but ended scheme in 2008. Currently, advisers own between five and 10 per cent of the share options. Advisers who put a minimum of £1m on the platform were offered share options. Firm moved into profit in 2011.
Ran shareholding scheme for advisers placing at least £1m on the platform from launch in March 2000 until 2008, dependent on the amount invested on the platform. Currently, advisers hold 13.8 per cent of the company. Shares are non-voting. In profit since 2003. In 2008, Transact’s parent company Integrated Financial Arrangement paid a £600,000 dividend to shareholders.
Offered share options at launch in 2009, ran for less than 12 months, Novia share options held by advisers between 1 and 2 per cent. No minimum investment on to platform required. Firm went into profit in January 2011.
White-labels Nucleus platform and announced in September it was to become Nucleus shareholder. Firm’s shareholding is currently being drafted. Firm uses SEI to power its corporate platform.
Looking to give advisers 10-20 per cent of firm, with advisers getting 50 per cent uplift on assets placed by March 20, providing total is over £1.2m. Those who invest after this will still get shares until February 2013.