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Goodwill hunting

How much is that network in the window?

I cannot remember the rest of the words of the song and I doubt that the author was thinking of a post-CP121 world when it was penned.

But spring sale fever is here. The networks, the nationals and the big regional practices are preening themselves in anticipation of a free-for-all as the need for distribution grips providers.

CP121 is, in my opinion, a done deal. Some tidying will be done around the margins but fundamentally the scheme of the new polarisation regime is set.

There will be the provider lead positioning such as “white-labelling”, a provision of a multi-tied host and, where relevant, buy-ins to networks and bigger strategic financial advice practices.

The priority in such fast-moving times is to remember that all distribution relies on those at the bottom level of the model.

If you do an analysis of the network sector, the bulk of members only have a three-month contractual tie. The vast majority of networks have no equity section for members. The same applies to the national/regional practices. Fortunately, a number of these practices have realised this and made an equity participation programme available for advisers.

Goodwill values

It is my opinion that any purchaser of a network will want defined and agreed distribution from the deal. The chance of a provider investing on a philanthropic basis is not high. The due diligence of any network will reveal huge potential advice liabilities and, in many cases, limited capital to fund future expansion.

The member contract gives the potential purchaser a headache in that the member is worth on paper considerably more than the value that you would attach to someone who could leave you in three months.

It is clear that any provider buying a network based on the members is short-sighted as members tend to vote with their feet if they are excluded from the deal. This is going to be the case if a polarisation decision is made without member input.

Legal prevention

The contractual position of the member will fundamentally alter if the services required to be an IFA are no longer needed. Does this mean a new contract? If so, then I hope that members join and consult on their contracts to ensure a fairer balance than is currently the case.

Having analysed the major network contracts, it is my opinion that the member is totally disenfranchised from the decision-making process. The only leverage that a member has is to resign (or threaten to).

The options

Over the next few months,a plethora of variations will be offered to IFA practices.

The key to the decisions is how far you wish to take an external partner on. Providers will queue up to guarantee themselves distribution.

Do not underestimate the attractive nature of the multi-tie offerings. There will be a few very well managed propositions which will offer all the final inducements you will need to ease your conscience as you give up your independent status.

A lot is going to depend on how involved you want to be in the process.

If you do nothing, then you will find that you are moved to distributor (AFA) status by your network.

Networks need commission. It is their lifeblood. Without being able to handle your money they will not be able to take their override.

The IFA status, offering the defined-payment system will simply not work for a network. You can imagine the disputes that will occur between members when they argue that the fee was charged for administration and not advice and therefore should not be subject to override.

What should I do?

The whole sector will be alive with soft loans, practice buyout options and retire-ment options.

If you look at the sector, you will see that the providers really want the members. They do not want the networks under AFA status. There is nothing in it for them. They have the resources to buy distribution and great greenfield sites without advice liability and prior regulatory issues.

As an IFA, you need to sit tight and see what is offered to you. Do not put the For Sale sign up over your office door just yet.

After all, without membership the networks have no distribution. Sit tight and you will make the right decision for your business and your future.

Gareth Fatchett is a partner in ProAct Legal Solicitors


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