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Contract chaos

Support services networks have become an accepted way of trading for smaller IFA practices. The relationship between the adviser on the ground and the network is usually covered by an appointed representative agreement.

An ARA manages the member firm/network relationship. The crux of the relationship is that, for an annual fee, based usually on commission override, the network provides services.

This is where, in my mind, the difficulties start. Networks have two distinct and different roles which do not complement each other. The first, as a primary duty, is to oversee compliance with the regulatory regime. The second is to assist members in business expansion.

When considering membership, the appointed representative agreement is a key starting point. The contract in nearly all cases is a standard document with changeable schedules to reflect the services and cost.

In many cases, the agreement is the last thing a potential member sees after negotiation. The process of authorisation and, in many cases, network transfer clouds people&#39s minds in analysing the relationship that will go forward.

An alarming number of IFA practices obviously do not read their agreements and have no idea what traps lie around the corner for the unwary.

This article looks at the major issues in an ARA and acts as a starting point for negotiation and analysis.

Major pointers

It is patently unsafe to assume that the relationship will be positive from now to eternity. The pension review shows just how quick the financial services market can change.

Commission sharing

How is commission paid? What is the time-lag from receipt to payment? Is interest payable on sums held in network bank accounts?

Clawbacks

Are advisers charged interest on clawbacks?

Indemnity clauses

How wide is the clause? Does it cover a narrow range of issues or do you give a blanket indemnity? If so, for how long? How is the indemnity notified to you? Do you have a right of appeal?

Compliance

What channels can an adviser go through to dispute a compliance visit recommendation? What appeal pro cedures are available against suspension of network termination? Can an independent arbitrator be appointed?

References

What protection do you have against a reference which reflects disputed issues?

Termination

What effect does termination have on your income stream? What period does a final account have to be forwarded to you? Can it be queried?

Client ownership

Who owns clients? Who owns renewal commission? Are you under a contractual obligation to pay for file copying?

Personal guarantees

For how much and for how long?

Examples

I have acted in cases where IFAs have been suspended from writing investment business without reason or warning. I acted where one business had a similar name to another within the same network.

The wrong business was suspended and the upshot was quite literally a ruined business.

I have acted in the negotiation on ARA business for IFAs. My view is that networks assume that people will simply sign up and take their chances. I have noticed that when proposals for amendment are put forward, networks generally accept them. This has to be an advantage to IFAs.

Conclusion

Once again, it cannot be stressed enough times – if you do not read your contract before signing it, you line yourself up for potential open-ended liabilities which can last many years. Negotiation is the ability to get the best for yourself. Common sense is the ability to walk away when you cannot get it.

Multi-ties may come to pass,making the place of networks an interesting debate. What is certain is that with the predicted consolidation of the IFA sector, businesses will need to understand fully the nature of the risk and reward within these contracts.

Networks are an accepted business through which to operate. Their judge and jury nature means that average IFA takes on a beast which can stop income, stop him working in the industry and lay him open to endless liabilities.

You have been warned.

Gareth Fatchett is principal at financial services lawyers Armstrong Neal Financial Solicitors and a director of ProAct

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