Rising revenues and headcounts pose questions over network viability
Experts are questioning whether network membership is still worth having for medium- and larger-sized financial advice firms, as businesses look towards further innovation and growth.
According to data released last month by adviser trade body Pimfa, 40 per cent of advice firms are directly authorised, compared with 60 per cent that are appointed representatives. While the proportion of firms that are DA has increased very marginally since 2015, when it was 37 per cent, Pimfa notes that over the past 10 years, there has been no clear upward trend. The proportion of DA firms has remained largely static, at between 35 and 40 per cent.
However, there is evidence to suggest smaller firms favour AR status. Data provided to Money Marketing by consultancy NextWealth suggests for AR firms, 34 per cent have between two and four registered individuals. As a proportion of AR firms, this falls to 10 per cent for those with more than 20 RIs.
Sixteen per cent of AR firms said they were a one-person band, compared to 11 per cent for DA firms. Fewer than 10 per cent of DA firms are sole traders, according to Pimfa.
The average size of advice firms has increased in each of the past three years, if only slightly, from 4.53 advisers in 2015 to 4.77 in 2017.
Network models still vary across the market. While some will mandate particular technologies or investment propositions, or are owned by a provider, others remain “as close to independent as possible”, as one former network director puts it.
These networks might not mandate any policies on areas that need to be addressed when seeking increased scale, such as in adviser recruitment or pre-approval for the vast majority of business lines. When it comes to technology, historically some networks have mandated little more than making sure business is all recorded on a specific back-office system.
Former network Financial Limited infamously prided itself on a relatively loose approach to adviser supervision compared with its peers, deciding a 2 per cent error rate in advice would be acceptable for advisers to be able to run their business as they saw fit.
Yet as the average advice business grows in size due to both consolidation and continued revenue increases for the profession, many firms looking to expand and innovate are reporting that the network structure can no longer fit their ambitions.
Having passed £18m in turnover and £3m in profit, LEBC cut AR ties with Tenet last year (although it still buys support services off the business), while last week national adviser Continuum decided to go it alone and leave Quilter-owned Intrinsic.
Managing director, Sutherland Independent
We have a really good relationship with Threesixty, but we also employ someone two days a week who can watch our accounts, give us management information and look at the language we use with clients. If you bring in the right people and the right quality around your business, you don’t necessarily need to use a network. We had Mifid II in place in January when others might not have been able to.
Having someone that knows your business through and through, like an operations director, is key.
Then you can keep on top of the compliance, the messages and the brand, and can have everything in place to go DA. The challenge you have got though is with things like PI, DB transfers and everything else coming around the corner.
LEBC was originally a member of Sesame Bankhall, which took a stake in the business to help it get off the ground, before moving to Tenet and eventually out of full network membership. LEBC director of public policy Kay Ingram says as the firm grew, there were multiple reasons why it wanted to stand on its own two feet.
These included the ability to make acquisitions itself, react quickly to client requests, reduce turnaround times for business and focus on more unusual business lines for advice firms, that their particular firm specialises in, such as defined benefit de-risking work with trustees. She says: “That advice in particular needs to be delivered within a certain timescale and needs consistency throughout the process.
“When you have 40 or 50 advisers dealing with one scheme, organising that with a third party involved does present additional challenges.
“We had a good relationship with Tenet and still do, but from a network’s point of view, they have other members as well as us. I would recommend a network to any IFA, but we are 18 years old, so have come of age.”
The boss of one AR advice firm, which has now reached nearly 20
advisers and a handful of paraplanners and is looking to leave its network, says a particular issue it has encountered with its network has been over charging models. They say, with Mifid II and other regulatory requirements coming in, the firm has had to put more work into ongoing advice, and would therefore like to increase fees for some services to cover the extra options for clients.
The source estimates there has been a roughly 30 per cent rise in the cost of an annual review. They say: “It’s not unreasonable to pass that on, but the network has been quite slow in that regard. Our business is now of a size where network membership is not feasible for very much longer. It’s a wider piece about how to scale the business a bit quicker.”
They predict that more networks will, like True Potential, Openwork, and Benchmark Capital, attempt to expand into other parts of the value chain, such as investments, platforms and technology, to give their advisers wider options.
They say: “Rather than trying to eat each other’s breakfast, they are seeing together they can be stronger.”
However, others point to the increasing cost pressure of professional indemnity insurance, particularly for scale businesses looking to transact defined benefit transfers, as a factor that may keep medium- to large-sized planning firms in the AR net. Ingram notes advisers may still secure better rates from platforms and providers with the buying power of a network than they can alone.
Network models can suit most shapes and sizes
I think the classic issue for firms leaving a network is that they have got to a certain size and the network is too restrictive. The main reasons are scale and cost. They have got to a size when in some cases they think they do not need the services they did when they started, and they are paying more for them than it would cost to deliver these themselves.
Some firms are quite happy to go DA but still buy in support services from the network. That can be a kind of transition. But some quite large businesses have remained until quite a mature stage of their development.
Some networks offer lots, others really just offer stripped down compliance and not a lot more.
I’m finding there are a number of organisations, if you are a relatively small intermediary with, say, one to five CF30s, that you can seriously think of becoming a member of so you can get services and focus on what you really do best, which is advising clients.
But with at least five registered individuals, or more practically 10, then I think the rationale for being a member of a network does decrease, and in certain circumstances you can become DA.
I do not think it is one-way traffic; just because you have got two CF30s does not mean you are going to be a member of a network either.
If you are paying somewhere between 8 and 16 per cent, you have to think quite carefully about what you are paying for.
If you take PI, while many networks say members should pay the excess, with compensation going up, I think that network membership becomes more seductive than it was previously.
You have to do a like-for-like comparison and with FCA fees and the cost of PI, that can be a reason why people remain in networks.
Roderic Rennison is director of Rennison Consulting