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Are small networks fish out of water?

Sesame believes only networks with more than 500 members will survive the current consolidation while Bankhall claims only itself and Sesame have the scale to build a workable multi-tie proposition.

But what do smaller networks – written off as “minnows” by Sesame group chief executive Patrick Gale – believe will happen?

Group 300, which has 90 member firms, is adamant that the dire predictions for smaller networks are wrong. Chief executive Chris Batten says: “We should perhaps tug on Patrick&#39s turn-ups and remind him that business is about ratios and margins, profit and loss. Success by City standards is more about value per unit. Perhaps the magic of the number 500 is some new financial model that has yet to filter down to the great unwashed?” Gale, who believes the smaller players will be unable to offer the four basic planks of a network proposition – service levels from providers, assistance in dealing with the regulatory burden, technological support and better commission – has certainly succeeded in provoking a few of the “minnows”.

Falcon Group chief executive Allan Rosengren, who has 140 members on board, says: “We will most certainly not be disappearing from the marketplace. We have got one of the strongest financial balance sheets out there. A network does not have to be big to make money. Many of the big players are losing money quite substantially.”

Unsurprisingly, it seems opinion is neatly divided between bigger networks, which agree with Sesame and Bankhall, and smaller networks, which do not.

Berkeley Berry Birch IFA network chief executive Richard Howells, who has 670 registered individuals, says he would largely agree with Sesame.

He also appears to be thinking along the same lines as Bankhall, which says smaller players do not have the scale to build a true multi-tie, differentiating this from a distribution aggregator which is largely based on commission and therefore easier to set up.

Howells says smaller networks and distribution groups are going to have an increasingly difficult time. He claims that as multi-tie discussions start to warm up, the smaller players, which are unable to deliver the same levels of business to providers as bigger ones, will be squeezed out of the market.

But Howells is not willing to go as far as Gale in his predictions. He says: “It is difficult to quantify the ideal number of advisers in terms of profitability. You could have 500 advisers writing double the amount of business or 1,000 writing half. It all comes down to the quality of the advisers.”

Whitechurch, which has 250 members, says it is very much alive and kicking but concedes that Bankhall has a point about multi-ties. Managing director Ian McIver says: “It could be that you need a bigger set-up for talking to providers over multi-ties but in terms of financial survival I do not see why you would. From a provider&#39s point of view with regard to multi-ties, we have still got 250 people bringing in business.”

McIver believes last week&#39s letter from the FSA warning intermediaries and providers over up-front payments for membership of multi-tie panels changes things. He had been concerned that bigger networks with more muscle would be more likely to get better terms from providers but now says: “I did have concerns that small networks would not be able to get the same terms as bigger ones but this letter has created a level playing field.”

Bankhall business development director Peter Mann interprets the FSA letter in a different way. He believes it means even fewer players will be able to afford to build a multi-tie. “Intermediaries should not be given money by providers just for multi-tie purposes but this letter will further detract from the desire of many players to multi-tie,” says Mann.

McIver does raise the point that paying one IFA more than another in terms of commission could also be described as an inducement, pointing out that this is still allowed.

Many smaller players believe Gale has simply misunderstood how a small-scale business model works. Mint chief executive Paul Gains, with 81 member firms, says: “What he does not understand is our business model, which is 100 per cent based on technology and so reduces costs significantly.”

Whitechurch says it is already profitable with 250 members and would be more so if it stopped recruiting.

McIver points to mortgage networks as the most likely to fall victim to lack of scale. He says: “Some of the recently set up mortgage networks have 10 or fewer members and are therefore unlikely to be able to cover their costs.

“But once a network has upwards of 50 members, if they are happy either to break even or to make a small profit, of course they will survive.”

Batten says: “We must look so small to those in their ivory towers, how can we possibly survive with only 90 member firms – unless, of course, the smaller networks have a proportionally smaller expense base? Now that makes sense, doesn&#39t it?”


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