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Salve for the sole trader

Sometimes even a tough Lancashire lad like myself has to admit to being very worried.

Not because of world economic meltdown, not because of the retail distribution review or the regulatory mountain and not even because of the looming capital adequacy changes. I am anxious or, perhaps more accurately, incredibly angry because, despite all the admirable work being done by Aifa and the various IFA educational organisations, there is a bombshell about to go off in this industry and nobody seems to have acknowledged it.

Over recent years, thousands of IFAs have decided to leave networks and become directly authorised. Most make the move following frustration with not receiving value for money from the network and therefore return to being directly authorised to hang on to more of their gross turnover. Recent FSA statistics showed that the number of these directly authorised firms increased by 12 per cent between January 2006 and March 2008, with more than 5,500 in this position.

Some have joined the growing band of pseudo-networks which have compliance and supervisory functions within them to assist with the compliant business process.

Others operate as sole traders, often working from home but signed up to non-regulated support services companies to grab a bit of commission uplift, oh, and perhaps a bit of compliance help on the side.

But as directly authorised IFAs working alone, trying to keep pace with regulatory change and finding time to run a profitable business, these advisers are reliant on accessing their own compliance resources.

I am sure there are quite a few individuals who do, indeed, manage to pull it all off but, in the majority of cases, I would suspect the reality is completely different. Why? Because there is nobody there to make them do this or check up on them and the industry resources just are not available in sufficient quantity to do anything about it.

Here lies the problem and, in my opinion, probably the next big bombshell to hit our industry.

The sad thing is that many of these individuals are trying to treat clients fairly and offer them best advice but some are writing big, complex or high-risk business without anybody checking the cases or overseeing the advice.

The providers with which this highly complex or risky business is placed have no need to check if the advice process is sound or if the adviser even has the relevant qualifications, they are just happy to accept the business, particularly in the current climate. Even if anything did go wrong, then no complaints come the provider’s way as they are not regulated to provide the advice in the first place.

What is the answer and why should these directly regulated sole advisers listen to me? Well, first, because when we decided to form our company, we took all the above on board.

With regard to bigger investments, complex or high-risk cases, we employ a team of people who are specialists in their own fields, headed by a chartered financial planner. All high-risk cases are signed off by this fully chartered function. Using this process – and unlike many networks which pass back the costs – the excesses that could come back and bite you are our responsibility.

Some businesses would run shy of encouraging competition but we believe other IFA firms should adopt this same model, if not for the reputation of the industry, then certainly to protect the thousands of advisers and our mutual clients who deserve better.

Chris Smallwood is chief executive at 2Plan

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