IFA networks provide a range of services to help advisers satisfy the heavy regulatory burden placed on the sector. But with the impact of the RDR on network business models, rising professional indemnity insurance costs, uncertain claim exposure and the recent collapse of Honister Capital, could the traditional network model be surviving on borrowed time?
Online support services firm PanaceaIFA chief executive Derek Bradley says the well publicised failures of large distributors in recent times is a stark reminder of where the control lies and the pain that can be felt by advisers and their clients.
“If the network hits difficulty, the adviser’s income flow can be interrupted. Also, the responsibility for advice sits with the network regarding dealing with complaints but with the adviser in compensation.” Bradley explains that advisers who leave a network lose control of how any complaints are handled and as the network no longer has an interest in looking out for them, the adviser could have a sizeable amount of money to pay in compensation.
Support service firms are quick to point to the potential disadvantages of the network model. Threesixty Services managing director Phil Young says networks started off as a good idea but there is often now a misalignment between the interests of the advisers and the big networks.
He says: “Networks were set up as a way of pooling resources and sharing risk. But it only takes three or four advisers out of 100 that rack up a large number of complaints for the cost borne by the network to soar. That, in turn, has to be passed on to its advisers.”
Ahead of the RDR, Young suggests many networks are too focused on striking deals with product providers and view advisers almost as an inconvenience.
SimplyBiz joint managing director Matt Timmins believes the network model has had its day due to the impact of heavy FSA regulation on the sector. He says: “Now the pendulum has swung so far that I fear we may see the end of many of the established networks. The costs associated with running a network are too high and there is no risk premium to be gained anymore.”
Timmins predicts that at least three major networks will collapse next year, putting thousands of advisers out of business for up to six months. He says that network members do not control their own business, own their own agencies, cashflow or clients.“You can work hard for years to build up a business and employ people who rely on you, then find you can’t trade for up to six months because someone you have never met at your network has done something wrong.”
Having been in financial services for nearly 25 years, Michael Both, proprietor of IFA firm Michael Philips has seen many changes driven by regulation. He thinks the point of networks is to distil regulation, enabling advisers to earn their money by dealing with clients. “About 20 years ago, one of my best consultants left and joined one of the first networks. They went bust, costing him a lot of money. That happened to the next one he joined too. The lesson I learned was that a network should only be trusted to provide a support service and should never own any part of my business. To be an appointed representative of a network was to be an employee in all but name, with all of the risks and none of the perks of owning your own business. Honister has just proved it.”
Helm Godfrey Partners chief executive Graham Cross suggests the self-employed route is a way to ensure advisers retain client relationships, leaving no doubt that the adviser owns the clients they introduce. “If an adviser wishes to leave, their clients will go with them unless they choose not to. The nature of networks means this is rarely allowed to happen but it now looks like a major weakness, as advice tends to become commoditised and impersonal. Further down the line this may lead to unsuitable advice being given or even mis-selling, which, if you look at consumer complaints, appear all too common in networks.”
Sesame Bankhall Group offers advisers both a network and support services route. Chief executive George Higginson feels the criticism facing networks needs putting in to perspective. “Pressure is being exerted on all firms, not just networks. We are seeing a lot of failures among directly regulated firms, including nationals, but the failure of a large network understandably draws attention.
“It is wrong and far too simplistic to group all networks together. Networks operate different business models, which is why firms need to undertake thorough due diligence and examine key issues such as financial strength, future strategy, leadership, long-term commitment and investment in services.”
Higginson believes that challenges such as the move to fees, which will effectively end enhanced commission for network members, means the model needs to evolve. “To be successful long-term, it was essential for us to diversify into new areas and open up new income streams, which we have done in a range of areas, including investment management and mortgage valuations.”
Mortgage and protection specialist Legal & General Network managing director Duncan Crocker suggests the viability of appointed representative networks will be easier if they broaden their services. “If they can generate value from activities around advice, such as selling someone a home, insurance products and conveyancing services, it will be easier to remain viable and they will be more likely to have positive cashflow.” Financial strength is crucial, says Crocker, so advisers know the network they join today will be here tomorrow and capable of withstanding regulatory change.
For Both, regulation is a minefield for advisers that needs a large resource devoted to it. He says: “Only larger companies can afford that in-house. Whether one needs to join a network to buy in that expertise or get it free-standing would seem to be the nub of the question. The advantage of a network is that they can offer a bundle of services at very keen rates. The danger comes when the distinction between independent services provider and franchise owner blurs. Then the franchisees learn to their cost that they fully own the risks of the whole organisation but not much else.”