Questions are being raised over the value advisers get for network fees as support service providers, traditionally limited to offering compliance services, continue to expand their offerings.
While taking on appointed representative status at a network can cost advisers a greater percentage of turnover, networks have modernised in recent years, with some offering access to exclusive fund ranges or pieces of technology as an incentive to members.
According to data collected by adviser trade body Apfa before its merger with the Wealth Management Association to form Pimfa, ARs still outweigh directly authorised firms in the UK, with 8,600 out of 14,000 advice firms taking on AR status.
There has been a very slight move in favour of AR status in recent years, however, which may partly be due to high-profile network failures including Sesame’s investment advice arm, choosing to focus just on compliance services through Bankhall.
It also reflects decision made by national firms like LEBC ceased to be appointed representatives of Tenet last year and has been directly regulated since August 2017 – though it remains member of compliance support arm Tenet Select.
LEBC puts the decison to go directly authorised down to its expansion plans and a need to have greater flexibility when making decisions such as acquisitions.
While some networks offer both options, few have reported strong growth in adviser numbers, particularly those at the smaller end of the market.
SimplyBiz membership numbers now stand at around 3,600, more than the number of advisers housed within the largest networks St James’s Place and Openwork.
The likes of SimplyBiz, Paradigm, Bankhall and Threesixty have also hit back by offering a wider range of services, with assistance on funds, discretionary services and acquisitions provided by some, while the adviser retains directly authorised status.
Last month, for example, SimplyBiz launched a referral service giving advisers the opportunity to pass on clients who are no longer viable for them to deal with.
If advisers are able to outsource and cherrypick the specific services they require from a support provider, is there any need for them to shell out for membership of a network?
Needs drive demand
First Wealth partner Claire Phillips was previously part of a small advice firm which was directly authorised.
While that worked well for a two-man band whose affairs were fairly straightforward, she believes being part of a network is a better option for larger outfits. First Wealth is a member of Best Practice. She says: “Smaller firms are a bit more under the radar; you might get the odd visit but you’re not a prime target for the regulator. But I think there is more value in being part of a network for a bigger firm where things can be more complicated.”
Simplicity is among the key benefits that being part of a network brings. Best Practice deals with compliance, back-office systems and returns to the FCA and is a particular help when new regulation or legislation, such as GDPR, comes into force.
Phillips says: “They do all the donkey work, analyse the rules and work out what needs to be done, and then they just tell us what we need to do.”
But being a member means signing up to the entire package. Advisers who use support service providers can often pick the specific areas they need help with to outsource, whereas a network member may be paying for services they will never need as well as those they do. Phillips says: “That is the downside; you have to pay for some things that you don’t want, need or see the value of.”
She adds that it is important to find a network that suits the style of your firm. Phillips regularly carries out complex financial planning work including enterprise investment schemes and venture capital trusts, and sought a network which would understand and deal with these more complicated products.
Argyle Financial Planning co-director Phil Melville says: “People are led to believe there is a process, that a network can guide them along to save them from the wrath of the regulator or ombudsman, but history tells us that’s not the case.”
His adviser firm is directly authorised and he has never felt the lure of being a network member, saying it is akin to being a pseudo-employee.
That said, he can understand why many advisers choose to be part of a network: “It’s like joining a club; I think a lot of people feel a comfort in the notion that someone is minding their back.” Yet for Melville, the benefits of joining that club are not enough to warrant the cost.
Plan Money director Pete Chadborn was a member of network Tenet until 2014 but “hasn’t looked back” since making the leap to becoming directly authorised.
Joining a network was a great help when the firm was first set up, providing “protection and a safety net”.
He says: “It’s like being part of a union; if anything goes wrong they fight your corner, field any complaints, read all the rules – which you’ll never have time to read – and find out what it means for you and what action needs to be taken.”
Phillips agrees: “On your own you are vulnerable. There is always the risk you miss something – you don’t understand it, you don’t know about it, or your interpretation could easily be wrong.”
She adds: “We have only had to do a small amount of work as a result of GDPR and Mifid II but it’s the picking through everything to work that out – we don’t have the time or expertise to do that.”
As the years went by, Chadborn started to question how much value he was getting out of the membership.
He felt the firm’s processes were strong and it was infrequent that he called upon the network for help with a technical query. Chadborn also found that a network was not much help when it came to more complicated or non-mainstream advice and products, such as VCTs.
“We were quite low-maintenance and we started to wonder if we really needed the network any more,” he adds.
The firm retained its membership as the RDR bedded in, “in case it threw up any surprises”, but he left in 2014 after giving a year’s notice.
Chadborn says: “We haven’t looked back since. Our assessment was right; we have good internal processes and have found the regulator fine to deal with.”
Part of the club
Yet clearly many advisers do still see the benefit of being part of a network; Openwork alone has some 3,800 members in its ranks.
Openwork wealth director Mike Morrow says: “If you want to maximise the time you spend with your clients then outsourcing aspects such as professional indemnity insurance, suitability reports and compliance to a network lets you do that.” He says the economies of scale are a main benefit, with networks able to read and respond to industry regulation on behalf of their members, and procure and manage funds and asset allocation.
Possibly more important than all of that though is the “comfort and support” that being one of a large group can offer.
Morrow adds: “There are around 25,000 advisers in the UK and many are one-man bands, and I think that can be quite a lonely existence. A network is a bit like a trade body; it puts you in touch with a group of individuals who are a bit like you.”
Melville agrees it might be particularly attractive to advisers who have previously worked in a large firm and since struck out on their own, pointing out that networks offer a “gentle step away” from one to the other.
Phillips also values the relationship she has built up with her network, arguing that this would not be the case if she was simply outsourcing various jobs to a support services provider.
Chadborn adds: “If you’re a small outfit it can be difficult to keep pace with all the regulatory changes, so what we might miss about not being in a network is having a place to go to for a quick answer on a technical question.”
Plan Money has hired an in-house compliance manager to oversee this part of the business, which it says has worked out well, but Chadborn points out this might be a false economy for a firm which is less confident in the robustness of its processes as, if anything does go wrong, it could be costly.
He adds: “I think some advisers would stay with a network because they worry about becoming directly authorised and being out there on their own but if you do the job for the right reasons, you don’t see continuing professional development as a chore and you have good internal processes, then you’ll be fine.”