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Is network membership worth it?

Latest data could herald start of move towards direct authorisation

Clients are constantly looking to get value for money, but so are advice firms when deciding on whether to stick with network membership or become directly authorised.

Networks are finding ways to evolve their propositions for their IFA members, with new carrots for joining and sticking around.

However, in a recent poll on the Money Marketing website, 58 per cent said they thought directly authorised was the way to go compared with 26 per cent for networks and 16 per cent who were undecided.

According to data from Apfa, now part of Pimfa, the majority of advice firms are still appointed representatives. 8,600 of the 14,000 advice firms in England and Wales have this status.

The 60:40 ratio between network and direct status has remained relatively stable over the past eight years, but, since 2014, there has been a slight uptick in direct authorisations, as 232 more firms opted for DA status, and nearly 500 fewer appointed representative firms were recorded.

A Platforum survey in June suggests that some of the most popular reasons for network membership are that it is simpler to run the business, that the support service is cheaper or better, or that the FCA approval process is easier.

Plutus Wealth partner Georgina Partridge was with an Intrinsic AR at a former firm. When forming Plutus, however, the team decided on the strategy to outsource where necessary, for example, in compliance, to be more cost effective, but not to become an AR again.

She says: “The speed of getting things done wasn’t great from the client journey point of view. Because the network was doing things for us it slowed it down rather than the other way round.

“Client outcomes are so important. Sometimes that’s forgotten. Sometimes the bigger networks are more about profitability.”

As Partridge points out, networks may also not be as secure as some advisers would like to think. Recent examples of closures (Financial Limited and Sesame) and ownership changes (Positive Solutions and Caerus) illustrate this.

She says: “I don’t think it guarantees safety…In my time in the industry, they’ve gone under, been bought out, changed, there’s been quite a lot of that.”

However, the biggest issue Partridge raises is one of culture at large networks. She says: “With the big players, it can be about utilising assets, moving them around for what’s most profitable…With the big networks it can be difficult to reconcile whether that’s better from the client outcome perspective or better for the network.

“Independence is really important to us and we want to continue in that way. High standards of independence, being chartered and all of those things are what builds confidence from the consumer’s point of view.”

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Pre RDR, networks were ingesting vast amounts of cash from providers and in addition charging the advisers who were part of them sizeable retentions. If many ex and current network advisers are to be believed, value for them was not always fully understood or appreciated and the sums being received from providers was not made too clear.

    Networks have many benefits for providers, they also greatly benefit small advisers; but they come with many downsides. especially if they go out of business as we have seen happen over the years.

    Network collapses are a fiscal version of the 9/11 twin towers collapses, businesses are lost, livelihoods and value destroyed, consumers affected and often there is no way out of the rubble for many.

    The costs of the collapse clear up falls to the FSCS and then ultimately back to the reducing amount of surviving adviser firms. Any indemnity commission debt fell to the provider.

    RDR was a wake up call for advisers. It was a challenge to providers and a potential problem for the financial stability of networks that mostly seem to see losses, not profits.

    Challenges for advisers are very well known and are endlessly discussed.

    Challenges for providers are not so clear to advisers but RDR for them has been extremely costly in fiscal as well as human terms with massive job losses.

    They also face the problem that as ‘manufacturers’ of product, albeit intangible, they still need to “shift those refrigerators”, get products to market.

    To do that, they need a route to market and a delivery vehicle. Pre and post RDR that is mostly by way of intermediated distribution and it seems to be the case that it will continue that way for some time to come.

    But unlike before RDR and the inducements directives, the manufacturer cannot pay the distributor ‘sweeteners’ to make their products stand out above the rest.

    Or can they?

    We saw recently a very clear statement, in writing, about distribution intent:

    “the current strategy is to spend our budget on buying marketing opportunities directly with the distributor firms that either support us or that we’re targeting”

    Pay to play lives, amazing.

  2. The answer is simple they “Never” were, they are “Not” and “Never” will be. The concept of Networks, has allowed the likes of SJP to get away with being called “Restricted” and I am convinced network members are Restricted.

  3. There’s no definitive answer to this question. It’s a matter of balancing a variety of factors and finding a recipe that’s right for you.

    As a member of a network but in regular touch with the principals of various DA firms, I don’t believe that being DA is a bed of roses and Tenet takes care of a number of tasks that, were I to have to do them myself, I would find extremely irksome and time-consuming.

    Inevitably, I have a few (relatively minor) niggles with Tenet (and for a while in 2013 it was a pretty awful place to be) but overall I’m pretty settled. It’s financially strong, has (so they regularly tell us) a good relationship with the regulator, what it charges me is, umm, not too bad and (since that awful period in 2013) it has striven to achieve a sensible balance between QC and allowing us to run our businesses in our own way.

    The worst thing about most networks is the costs of leaving (as we’ll all have to do, sooner or later), unless of course, upon retirement, you can hand over the business as a going concern to a co-principal.

    To counter the completely false claim regularly posted by a certain other commentator, one thing that Tenet has NEVER done, is attempt to influence our choice of product or provider other than on grounds of suitability. I can’t speak for any other other network though, unless they’ve chosen to limit the roster of providers that their members are allowed to use, I’d be surprised if they’re any different in this regard.

    • Ok yes Julian there is a definitive answer, as others have already pointed out.
      1. Networks have tended to pander to the lowest common denominator. (I accept there are exceptions, but I well recall how they squealed about RDR.)
      2. The largely (and again with some exceptions) cater for the timid and the lazy. Those not willing (or able) to do their own research. Those who can’t or don’t want to engage directly with regulations and take a naïve or exaggerated and erroneous view (which is in the Networks interest to foster).
      3. Those who foolishly believe that the Network will protect them.
      4. Those who can’t or believe they can’t obtain PI cover.

      If you do the maths you will also see that Network membership is far more expensive than direct regulation.

      So you will therefore see that Robert Milligan is perfectly correct.

      • What, if any, personal experience do you have of being a member of a network Harry? And how much time did you used to have to spend doing things that you could have paid someone else to do for you, thereby allowing you more time to get on with doing other things, whether that was servicing your clients or enjoying a day out of the office on your own pursuits?

        • I am well aware of the costs and constraints of Network membership, having a relative who was a network member for over 20 years. And of course your post amply illustrates my accusation of idleness.(enjoying a day out of the office on your own pursuits?)

          Judging from the reactions of my clients I would suggest that they were perfectly well serviced and by doing all the work one at least has a firm insight and understanding of all aspects. How much can you know about a fund if you don’t do your own research. One’s own questions and investigations can sometimes be far more rigorous than some admin person with less direct interest. Would you invest your own money by just relying on someone else’s opinion? You might, but I certainly would not.

          Sorry if my response wasn’t fast enough for you, but as you know we no longer get notifications is there are further posts on a topic to which we have contributed.

  4. Nicholas Pleasure 29th September 2017 at 1:47 pm

    I have recently left a network to go DA.

    The first issue in balance is the shear time it takes to become directly authorised. I left a previous firm and needed to set up quickly so a Network was the only option.

    Networks are great when you first start running your own firm. They make sure that your compliance is good and that you understand what a good file looks like. They also provide you with all the tools you need such as systems, factfinds, risk profilers, research etc.

    You may not always like their tools but they give you the time to find ones that you get on with.

    On the downside they are quite expensive and can be restrictive. One of my issues was that I wanted to take regular fixed retainers by direct debit. The network didn’t have this facility and I couldn’t be paid direct.

    Originally I also felt that I was safer in a network. However, I’m not so sure about this one. The FCA is much more likely to come down hard on a network because the potential for harm is greater (and they can pay fines). Essentially, in a network, your authorisation can be threatened by someone else’s greed/stupidity.

    As a DA firm I am responsible for my own destiny and providing that I give good advice, look after my clients well and keep within the rules I am highly unlikely to get the attention of the FCA. I expect to be left alone.

    The other big advantages of DA is that it is much cheaper and I have the flexibility to develop advice and payment models for clients outside of a network ‘one size must fit all’ approach.

    Things like Gabriel is a downside but if you set up your accounting system correctly the data can be readily available.

    I appreciated my time at a network and have nothing but warm words for them as an organisation. However, DA is a much much better option and I would not go back.

  5. I joined the Federation of Small Business (FSB) and found them to be unhelpful and merely using members to obtain sponsorship money to pay their employees large salaries – and passing off our information to third parties for sale of contact details EG Co Op Bank Insurance and card reader achiness. Are networks worth it many are worth every penny of membership – yet others offer little by way of help or assistance EG FSB – and use their members names and networking for selling purposes.

    • Some years ago, the firm with which I was then involved received an approach from the FSB and the job of discussing with their representative what they felt they had to offer us was passed to me. After about five minutes of not getting the responses he wanted, i.e. Yeah, sounds great, where do we sign? the guy declared that he didn’t think he was talking to the right person, cheeky swine. And that was that. We never heard from them since.

  6. Our issue with any network is that there compliance is overly restrictive, set to regulate to the lowest adviser level.

    What I mean by this is that they restrict client outcomes based on a generic ideal world, not individual cases. The rules are set and very inflexible, often set to a level where clients cannot achieve their wishes due to the networks fear, that due to having to monitor so may advisers, they cannot distinguish between the genuine cases.Even if they are willing to consider the genuine cases, the marathon you need to run to gain approval is not viable.
    I would also add that from what I have seen, any complaint will only ever be managed in the best interest of the network, not the client or the adviser.

    Having been regulated via networks and nationals, our personal preference has been directly authorised. To me its very simple, we/I’m now responsible, I buy in compliance, I take professional advice from external sources, but the final say is ours and the responsibility.

    As we would not do anything to place either clients or our business in danger intentionally, we do not see the benefit of the additional costs.

    For some the cost and support is right, its up to the individual businesses.

  7. Having been heavily involved in networks, both on the network side and on the Principal side there are some clear differences and it depends what type of firm you are and what you like/want!

    When we started our last business we chose a network as it allowed us to get started quickly, no capital adequacy issues, pre-written procedures and processes, access to resources we didn’t want to employ in start-up business, lots of good people giving you support and they took the risk initially. And whether we like it or not most advisors are not up for trawling through FCA rules, spending days reading FOS decisions and constantly figuring out how to protect their businesses and their clients and constantly adapting to deal with latest thinking – so a network can be a perfect environment for them.

    Downside is it is a one-size fits all approach, bottom line is the risk sits with them so it is up to them what you advise on or not, they will have no option, as a big business, to protect their business and shareholders at all times so cannot be truly customer orientated- or even advisor orientated totally. Also the time from speaking to customer to delivering the advice they want can be ridiculous and lose you business. Deciding whether the advice process has been delivered properly or whether you have to walk away from cases is up to them alone- based on their own risk appetite- not necessarily because it is right for your client or that you are doing anything wrong.

    So for my next business, I swore I would be DR. It was hard work getting ready for it and I am still deciding on bits of the jigsaw puzzle to get the best service I can for my customers. But I can react to my clients and their needs effectively, offer guidance and advice services, use my common-sense and years of compliance experience to make my own calls on cases and can deliver advice within my own timescales.

    So I would always vote DR for people who understand the risks, put the work in to design a good business model and put time aside to understand the compliance culture they are working, and who will be determined to do the work to stay up to date with systems, rules, products, taxation etc etc.

    I think it is a dreadful idea to go DR because you think it is easier and cheaper- it isn’t- it is just different.

    But it is under your control for better or worse.

    I love it!!!!

    • Unlike those from Harry Katz (who, from his lack of any response to my question as to whether he has any direct, personal experience of network membership, I suspect has none), a well balanced post.

      That said, I never understand claims that a network takes on any risks arising from its members’ activities. Whilst the network is the first port of call for any complaints, it’s you, the member, who will have to pay any compensation not covered by the network’s PII. (Some say that, ultimately, the network will come after you to recover what its PI insurer DOES pay, though on this point I’m not sure).

      If the PI insurer declines to pay a claim that’s gone against you, you’ll have to pay the full amount of any compensation awarded.

      The only risk to the network is reputational and, even then, that doesn’t replace the risk to your reputation. It’s merely in addition.

      There will always be frustrations over a network sometimes not allowing you to undertake certain transactions or use certain products/providers/funds that, to you, seem fine. But, if you’re a member of that particular club, you have to accept that they, not you, are responsible for defining what their members may and may not do. Yes, it may be a bit of a OSFA approach but, as seen with the downfall of Financial, a network cannot just allow all its members to do their own thing. That would be a recipe for chaos.

  8. Trevor Harrington 6th October 2017 at 4:25 pm

    Being a member of a network simply means that they OWN YOUR CLIENTS and they OWN YOUR CLIENT FILES ….. no matter what they say …
    What was the question again ?

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