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Campbell Macpherson: 10 questions you should ask your network

Campbell Macpherson MM blog

2013 is the year when a large proportion of advisers will be taking a long, hard look at their suppliers. Platforms, adviser technology providers, networks and DA service firms will all come under scrutiny as advisers look to forge the right partnerships that will help them to thrive in a post-RDR world.

And the most important decision for a large number will be to do with networks. Firstly, should I be part of one? And then (if your answer is yes), which one should I choose? While the answers will be depend upon the proposition you want to deliver to your clients, your long term business plans and your personal appetite for risk, I have compiled a checklist that I hope you find helpful.

The first five questions are all based around the fundamental and critical conundrum, “Is your network likely to survive RDR?”, because let’s face it, if your answer isn’t a resounding yes to this, there is no point proceeding on to questions 6-10.

1. How well has it managed its liabilities in the past?

Or to put it another way, “Can it secure PI insurance – for itself, for you and at a price you can both afford?” The demise of Honister amply demonstrated the consequences of inadequate compliance. If the PI markets lose confidence in you, it is game over. One of the recurring certainties in financial advice seems to be that some of your actions in the past (no matter how well intentioned at the time) will come back to haunt you – you just don’t know when or how much it will cost. This has led to even fewer insurers willing to provide advisers and networks with PI insurance. One of the tangible advantages of being in a large network is the ability to obtain PI insurance – but the cost and quality will vary considerably.

2 Is the network profitable?

This is important. Making sustainable profits is the cornerstone of any business. Why would you trust your business to a group who can’t run a successful business themselves? And every successful business needs to be profitable – or one day its right to exist must surely be seriously questioned. The problem is, very few networks are profitable and even those that do sneak into the black don’t do it particularly convincingly. Sesame Bankhall Group, a business that has prided itself on delivering annual profits, only made £2.2m in 2011 on total revenues of £170m, and its AR network actually posted a loss of £2.5m (after paying out a massive £11.4m in claims).

Openwork, a network that has never made a profit, posted a whopping £13.3m loss last year (which was put down to accounting anomalies and restructure and RDR costs). Intrinsic was £2.5m in the red (also due to RDR), Tenet posted a £300k loss, Positive Solutions lost £106,000. Lighthouse made a tiny profit. Even though many of these networks are forecasting profits in 2012, this is a sector that has been doing it tough for years – and for many, the truly difficult times are still to come.

A sub-question to this one is, “What is the network doing to streamline its operations?” Just like everyone else in retail financial services, networks need to reduce their on-going costs. With very few exceptions, you are likely to find that their people costs are too high, their processes are too complex and not customer-centric, their use of IT is ineffectual or they are burdened with a mountain of shareholder debt (and sometimes all four!).

Demonstrating a track record of sound financial management is important; however it is also backward-looking. What you really want to know is the likelihood that the network will be sustainably profitable post-RDR. Network revenues will inevitably take a hit due to a decrease in revenues from investment business. How well has your network modelled this and are you comfortable with their assumptions?

3. Is its business model sustainable?

This is the big one. The traditional network business model has been transparently broken for much of the last decade. If it wasn’t for life companies “investing” in networks (primarily due to a misguided fear of losing market share if they didn’t) very few would still be operating. The revenues generated from member fees and keeping a slice of commission have rarely outweighed the extortionate costs of compliance and redress. And the almost unlimited and unquantifiable liabilities inherent within the network business model have valued most networks at little more than the amount of cash in their bank accounts (and sometimes several tens of millions less!). So, they had to do something.

The likely survivors have managed to diversify their revenue streams through a combination of:

  • Strengthening the mortgage and protection parts of their business (which will offset the inevitable downturn in investment revenue next year),
  • Expanding into other related services such as conveyancing,
  • Offering advisers the choice to be IFA or restricted, and perhaps even
  • Offering advisers the choice of being directly authorised or an AR of the network.
  • But the key driver of elusive shareholder value for networks is exactly the same as that for IFA firms – building recurring revenue streams.

It is really only the threat of RDR that spurred the vast majority of networks on to create their own fund management arms and building their own investment platforms, … both critical to their future.

You especially need to understand your network’s strategy in these areas. Is its fund management strategy robust and does it add genuine value to the investor? Is its platform strategy robust? Will the network’s advisers embrace it?

To be amongst the survivors, your network must create recurring and compounding revenue streams, primarily through building substantial funds under administration on their platform. Are you confident they will do this? Will you and your fellow network members work with them to make this happen?

Platforms and fund management have the potential to transform a network’s business and perhaps even (finally) generate genuine long term shareholder value. But it will take time. So the next questions you should ask is, “Does the network have the capital reserves and genuine shareholder support to weather the oncoming storm?”

4. Does it have the capital reserves necessary to satisfy the FSA’s “plausible but nasty” scenario within their Threshold Condition 4?

In other words, in the eyes of the FSA, is the network solvent – and likely to remain so? Obviously I don’t have to stress how important this is. Just ask your network the question and probe their answers intensely with a quizzical and hyper-critical eye.

5. Are its shareholders genuinely willing to stand behind the business if it gets into trouble?

I have used the word “genuinely” on purpose. Every Lifeco with a shareholding in a network will say they stand behind their investment and that they have put their brand and reputation on the line. The “conventional wisdom” is that the FSA will take a very dim view of any Lifeco that lets a network fold, but I am not so sure this is as true as many would like to believe.

In 2004, Skandia closed its Bankhall network which at the time was the second biggest AR network in the industry with around 6000 members. It doesn’t seem to have done this insurer any long term reputational damage whatsoever. Commercial reality will come before esoteric reputational risk every time. My rule of thumb is … if the network actually delivers significant business to its life company shareholder/s, there will be a commercial imperative to continuing to support it through the difficult times ahead. Very few networks have such a symbiotic relationship with their shareholders.

In fact, in the past, some IFAs have gone out of their way to not sell the products of the Lifeco that owns shares in their network. Such a Quixotic act of independence may backfire badly in a post-RDR world. The best way to ensure your network’s survival post-RDR may actually be to champion the cause of its shareholder/s. Another sweet irony of the new world in which we will find ourselves in just a few short weeks’ time.

… to be continued. Questions 6-10 to be published next week.

Campbell is managing director of consulting firm, Campbell Macpherson & Associates. His career has included executive roles in Openwork, Zurich and Sesame.

PS: Questions 6-10 will be:

6. How are the network’s directors remunerated?

7. When it comes to PI insurance, are you costing me money or saving me money?

8. Why shouldn’t I become directly authorised?

9. What happens to my trail commission if I leave?

10. How can you help my business become outrageously successful?


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Ho Ho Ho!
    Excellent questions. I wonder which (if any) Network can answer all of these in the affirmative?
    Anyone willing to take bets?

    I wonder why members haven’t posed these questions before now.

  2. Great questions indeed – wish I’d asked them all (might have saved me some grief). Many of them should also be asked by anyone considering joining an existing firm of advisers.

  3. Some of the networks make a loss as the directors are taking out lots of money in wages and bonuses, as they don’t want to leave the money in as should something go wrong they will loose it.

  4. Peter Maxwell-Lyte 21st November 2012 at 7:58 pm

    I am just so grateful to have been able to travel a further two stops on the Newcastle 22 Bus Route to reach a company that have thought it out and who look into the future with marvellous vision. Because I have been revitalised by someone who always made a profit when he owned the Network that I escaped from!

  5. I answer from my own knowledge of the network I am in.

    Definite yes’s on 1-5.
    6. Directors: Open.
    7. PI: Saving.
    8. Why not direct: This is far easier.
    9. Trails: Stays with me.
    10. Generally, day to day they leave me alone, no panels, no shortlists, no required software, all fees / commissions paid direct to me from providers and excellent technical support when I need it.

  6. Some of these networks aren’t meant to make a profit. Campbell, you worked at 100% Zurich owned Openwork; it is designed to make a loss. The principal purpose of the network was to protect Zurich business past & future.

    Network bosses cream off the profits and I can’t see many of them making profit post RDR without brutalising their members.

  7. John Cartlidge, this network sounds a little too good to me so are you prepared to name them? I may even be interested in joining if all you say is true

  8. Networks fall into 2 categories
    – old school failed propositions, normally identifed as insurance company owned, lower avergage production and rapidly falling number
    – new style, more like the old “nationals”, with smaller high quality managed numbers of Chartered advisers and robust businesses and few legacy issues.

    I’ll aswer this as a former member of an old style Positive Solutions

    1) Better than most, but still got huge Keydata issue
    2) No, losing money, losses reduced by jacking up fees substantially
    3) No, doesn’t own IT, platform or investments, plummeting numbers and can’t recruit
    4) Yes, debt free and £20m cash in bank
    5) Aegon ? Publically, yes
    6)Well as employees only
    7) Costing, retention rates at 35%-22% for most with little more than PI and the old True Potential IT system
    8) Many PS members are very small one man bands and couldn’t go it alone
    9) Stays with PS until you move it individually- huge problem post RDR
    10) Can’t, no business development, stopped Professional Introducer work, no leads, no business or marketing support

  9. When I found myself thinking the same as John Cartlidge I thought I’d check to see what Network he is a member of to see if it’s the same as mine, and it is. Maybe joining independently owned Networks (and avoiding ones owned by a distributor) is key? No ulterior motives other than helping their members and making a profit.

  10. To KRW: Financial Limited.

    To James Hurdman. Nice to meet you!

  11. Campbell Macpherson 24th November 2012 at 11:39 am

    Some truly insightful comments. Thank you. Just sitting down to write questions 6-10. Need to add a technology question. Looks like it will be 11. Several smaller networks have been in touch to say they will be addressing these questions for their members. No large networks called yet …

    Regards Campbell.

  12. Fearful of the wrong approach from certain regulatory quarters, obviously Financial do file checks, pre-scrutinise higher risk business, require MI & accounts and do compliance visits and compliance training seminars that are mandatory attendance.

    I have been with them since 2002 I think, and whilst every business operation has its ups and downs, no reason to leave…yet!

    Campbell, if you wish I can put you in touch with the right people for you to contact. Just let me know. As commented, my contact details are on the register.

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