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Network Edge:Ken Davy

Networks are no longer adding value to IFA firms, rather they add costs and complexity while doing nothing to enhance the IFA’s adviser-client relationship. Networks are now proving to be the dinosaurs of the industry.

As the creator of the IFA network concept, I yield to no one as to the value and importance of networks to IFAs in the 1980s and 1990s.

Indeed, I believe that without the success of networks and the work of IFA Promotion it is likely that the IFA sector would have been reduced to a handful of specialist firms, while the great mass of consumers would have been denied the valuable benefits of independent advice.

Today, however, the world has moved on and I believe that networks are no longer adding value to IFA firms, rather they add costs and complexity while doing nothing to enhance the IFA’s adviser-client relationship. Networks are now proving to be the dinosaurs of the industry, burdening their members with top heavy management costs and time-consuming processes at a time when IFAs are striving to reduce overheads and increase efficiency.

Additionally, the problems of network membership are potentially much more damaging and run much deeper than simply concerns about costs and complexity.

The reality is that as a network member you own neither your agencies or your clients. This stark fact means that, in practice, you do not control or own the business, and as John Ellis highlighted, in his recent article (Money Marketing, November 11) on the perils of joining a network, your income is always at risk if you do not receive your commissions direct from the product providers through your own agencies.

I would add that as a member of any organisation, whatever its size, if you do not have direct control of the agencies, your cashflow and your business are at the mercy of the organisations actions which are totally beyond your control.

Some organisations claim that the use of a “Trust Account” will protect your commissions from creditors or administrators but there are grave doubts as to the legal robustness of such arrangements, and when they have to be put to the test it is always far too late to rectify matters.

Another absolute reality is that it has now been formally confirmed by Customs and Excise that clients belong to the network not the adviser.

Even some very large service companies have adopted this policy in an attempt to dodge the VAT.

Personally, I believe that giving up client ownership and potentially all the income that goes with it,is an outrageously high price to pay to avoid a bit of VAT.

In a nutshell, it is clear that a network member has no control over agencies, cashflow or clients and pays a high price both in terms of absolute cost and the hidden costs of time-consuming complexity for the privilege.

Given these realities is there any wonder that commentators are increasingly highlighting the dangers of network membership which have been so amply demonstrated by some of the recent high profile failures.

Stanley Lovell’s letter (Money Marketing, 18 November) makes the very valid point that small and medium-sized firms need support and I agree wholeheartedly.

Indeed, the recent Henry Samuels Marketing Service Report demonstrated that 88% of directly regulated firms relied on an external compliance service. The key difference is that a directly regulated firm is free to implement the FSA rules in the manner that best suits their particular firm, not some “lowest common denominator” that increases the time and complexity of virtually every task.

At SimplyBiz we have assisted many hundreds of firms to make the switch from network membership to direct regulation by the FSA. It takes between three to four months but once the move has been completed, we consistently receive these three key comments from our member firms.

The first is the IFA’s relief at being back in control of his or her own business. With all the agencies in their own name, commissions are received direct so they are paid more quickly, and the firm also has the peace of mind of knowing that everything is under their own control.

Second, our members are delighted by how much time they save because they are able to embed the FSA requirements into their own business methods instead of, again, trying to make some one else’s system fit their business.

Finally, because we only charge 2.5% they find that they have a much healthier bottom line.

In the light of these realities is there any wonder that network members are voting with their feet for direct regulation in increasing numbers.

Ken Davy is chairman at SimplyBiz

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