Tougher monitoring and a tighter grip are needed to meet standards in recruitment and retention
Advice firms aren’t perfect. Just like any other business, rogues will crop up, and some staff will perform better than others.
In its annual results last week, national advice and wealth business Tavistock set out its stall very clearly: it had “successfully encouraged a number of poorer performing appointed representative firms to leave the group”.
But as professional standards continue to creep upwards in the advice sector, the firm is far from alone in setting up tough monitoring and feedback processes for its planners.
With suitability standards still front and centre of the regulatory agenda, and the Senior Managers and Certification Regime due to be rolled out to advisers later this year, the onus on financial planning firm leaders to weed out the chaff has rarely been greater.
Just this week, the FCA released the results of a review into what governance procedures investment management principals had over their appointed representatives, finding that most “were not assessing the risks these activities posed to their firms”.
Following on from Money Marketing’s work on phoenixing last week, we look at how firms can go about showing the door to advisers that simply do not cut the mustard, and the consequences they could incur for trimming back their ranks.
Tackling Tavistock’s troubles
Tavistock might have more reason than most to make sure it is nudging advisers in the right direction.
The results also reveal that because of the activities of a former fraudulent adviser, it had to put aside some £2.5m in costs to cover potential liabilities.
Neil Bartlett was sentenced to eight years’ imprisonment in December 2018 after living a “playboy” lifestyle, including gambling and prostitutes, using client savings.
Tavistock also sold part of its advice network, Tavistock Financial, to Sanlam in 2017. This part included advisers from the collapsed former network Financial Limited, which it had acquired just two years earlier.
Financial Limited’s former boss, Charlie Palmer, became well known after receiving an FCA fine for allowing appointed representatives of Financial Limited to give potentially unsuitable advice on high-risk products such as unregulated collective investment schemes.
When asked by Money Marketing, Tavistock did not provide exact numbers on how many advisers had been managed out, over what timescale this had applied, or what precise criteria were used to measure underperformance.
The firm is clear that it will continue to focus on “quality over quantity”, with both a commercial and regulatory risk-based outlook when it comes to adviser management.
In a statement to Money Marketing, the firm said: “Tavistock is only interested in working with a network of advisers and firms that are both client-centric and keen to work with us to expand their businesses. Partnership and collaboration to these ends reduces risk and improves client outcomes.
“If we become uncomfortable with the quality of client service provided by advisers or their commitment to business development, we will work with them to try and improve the situation. If that fails, we will terminate our contract.
“Our focus on partnerships, business development and direct-to-consumer distribution outside our own network means that we can continue to focus on quality over quantity when it comes to adviser recruitment and retention.”
This could have an impact on the firm’s bottom line, however. Tavistock notes that because of its pruning policy – combined with the impact of Mifid II – advice revenues dropped 11 per cent in the year to March 2018.
There can also be legal complications when looking to cut ties with an adviser. This is not just the case with enforcing restrictive covenants, where firms can incur costs to ensure departing advisers do not take their client with them to their new home, but also other potential workplace law issues like wrongful termination.
Earlier this year, a former adviser at IFA firm Skerritt Consultants won a court case against the firm claiming that he was entitled to a cut of more than £8m in dividends received by managing director Richard Skerritt and Catherine, his ex-wife.
This is not to mention that the liabilities from bad advice given by one individual, in the form of Financial Ombudsman Service complaints, for example, can apply at the firm level, and that the terms on which professional indemnity insurance will pay out, particularly for higher-risk business, are getting tighter.
Chief executive, Richmond House Wealth Management
Adviser performance is an issue for most small and medium businesses. Not only do advisers see themselves as too professional to sell (as per solicitors), but once they have a client bank it is difficult to manage them out as there is a shortage of replacements. Talk to any recruitment agency; demand for advisers outstrips supply.
RDR and over-regulation is to blame. Young advisers used to cut their teeth on younger clients, selling protection and regular premium saving. This has disappeared with the abolition of commission and the indoctrination that says if you sell you can’t be professional.
This means managing underperforming advisers out is not an option for most firms.
The FCA needs to take note and acknowledge (responsible) selling is vital to enable the masses to gain access to advice.
Moving the market
Despite the potential commercial hit, Tavistock is not the only firm in the market seemingly keen on keeping a tighter grip on adviser numbers rather than expanding rapidly.
For example, a source close to Intrinsic told Money Marketing back in 2017 that the network was looking to prune underperforming advisers that were deemed to be a risk.
While Intrinsic said there was no “structural programme” to de-authorise members, its wealth network managing director Steve Fryett said that the network “has a duty of care” to monitor customer outcomes and “cannot authorise firms that do not meet expected standards”.
Previously, Intrinsic had also considered introducing a “quality kitemark” for paraplanners used by the network, but further performance checks showed that they were meeting the required standards.
Sandringham chief executive Tim Sargisson says his firm has also put in place a number of initiatives over the past four years aimed at managing the performance of the network’s advisers, which will become even more important for boards when the SMCR comes into force.
“It’s fair to say we’ve had a number of advisers who didn’t really fit the model we were trying to build. We explain to them that this is where we are taking Sandringham, this is what we expect from our advisers, and if that’s not what appeals to you or its something different from what you thought, then clearly we need to have a discussion,” he says.
Under the SMCR, even small firms will need to attest that each adviser is fit to practise and competent on an annual basis. While one-man bands may only need one senior management function for “compliance oversight”, other directors will have to set out statements of responsibility, making particular individuals accountable for conduct in different parts of the business.
However, Sargisson acknowledges that underperformance in terms of fee generation is also becoming more important to monitor, given that costs like professional indemnity insurance, membership fees and regulatory levies have increased.
“That is reflected in fees we charge our partners. Some understand that and agree to improve their own performance, and we help them charge appropriate fees for the value they add,” he says.
Sargisson adds that when it does come time to part ways with an adviser, this is made easier by the wealth of data the firm collects on its planners, but also by a more relaxed approach to client ownership than other networks.
“It was binary with the RDR; you had either done everything you needed to do, or you couldn’t advise. I see the SMCR as a similar sort of process. With our monitoring we can see if they are not up to the threshold.
“If they want to argue with us, we can point to a whole load of management information that says they haven’t. We can say you are a risk to us, and we will manage them out or put a training plan in place.
“If they want to go and they find a home, we won’t stand in their way. We are not going to start firing legal letters all over the place.”
Good financial monitoring can spot areas where advisers can be helped more
You need good monitoring before you push people out. You tend to go through a process where you might flag up a number of things. We have a breaches system where if you get more points, you get more supervision. This flags up members where we might need to help them more. Maybe they’ve breached accidentally rather than deliberately or it’s a training issue.
If it’s a moderate training issue, you might get a competence officer to visit and come up with a plan. If we felt it was more than that, they could come to head office for a training course on advice standards, and what good advice looks like.
You have to go through the Statement of Professional Standing, which is frequent, so we know the number of attempts they’ve had.
But we also do financial monitoring, for things like credit card debt and vulnerability.
Our advisers have to do a fitness questionnaire similar to what the FCA initially uses to authorise, but we do it every year, and it asks about legal proceedings and bankruptcy.
There might be a very valid reason for personal debt increasing. But if there isn’t, it could lead to enhanced monitoring, because an adviser could missell because they are desperate for income.
We can put people on mandatory paraplanning or on pre-sale approval.
If we see adviser standards improving we would work with them. But if they say the right things, and we don’t see improvements, that’s when we might say this isn’t working.
Serious offences are things like selling an unauthorised product, or doing a defined benefit transfer without the appropriate licence.
But it is very rare you would terminate for a one-off thing; we do look for a way to help advisers.
For some businesses, it might come down to commercial factors.
A lot of advisers, maybe some of the older ones, have a happy client base, but are not writing a lot of initial business because they survive very well off recurring income and don’t want to take more on.
Caroline Bradley is group risk and regulatory director at Tenet
Putting off potential entrants
Might such a robust approach to adviser monitoring potentially put some advisers off joining a firm, or write off some types of business even when it might be appropriate?
One advice firm chief executive says a healthy middle ground, where advisers are free to use their best judgment, but also know that the firm can pick up on recommendations that do not suit its risk outlook or philosophy, can be achieved.
They say: “It’s a balance between treating people as professionals, but also having a regime that constantly monitors what people do. It’s not Big Brother breathing down your neck, but we have an approach where we risk-track anything people want to do, and some stuff would have to be signed off by a director.
“It’s simpler if you are relatively small and can check, but you would stick out like a sore thumb with us if you wanted to do that. If someone had a big back book of legacy business, we wouldn’t necessarily want them to join us. Some of our clients describe us as a bit boring and we would rather stay that way.”
Whether looking at things from a risk or a revenue perspective, it’s clear that advice firm management is taking a tighter line on what it expects from financial advisers. With the FCA to shortly follow up on its advice suitability study, it is highly likely more firms will look to prune their underperformers in years to come.