True Potential managing partner David Harrison
I don’t think there is much alternative other than to be directly authorised. This business, like any others, is all about making a profit. If you study the UK distribution landscape, you will find that there is no network of any size that is currently profitable. These figures are publicly available – all the networks are making a loss.
This is nothing to do with the very capable people that are running these businesses but it is a flawed business model. They were designed for the 1990s when everything was paper-based. As this century has gone on, each one has generated greater and greater losses. This means that they cannot provide any “protection” for the individual RI.
Capital adequacy is often given as a reason to join a network but under the RDR it will be easier to achieve the capital adequacy requirements as a smaller firm. Just last week, the FSA reduced its fees to a minimum of £1,000 (from £1,800). Also, PI Insurance should theoretically be cheaper if you have more people but all it takes is one offender and that cost is multiplied throughout the organisation. It suffers with having to go with the lowest common denominator.
If the networks are losing money now while they are subsidised by the life insurance companies, they will suffer more under RDR. Under the RDR, they will not be allowed to have these alliances. They only existed because the product providers wanted advisers who could sell their products. Ultimately, I just can’t see a way forward for the networks for independent advisers. I think it will be OK for tied advisers. The only area where numbers of newly FSA-registered firms is holding steady is in the directly authorised area. True Potential helped 135 firms become directly authorised over the past year.
The directly authorised firm will tend to average about three RIs and will operate in a similar way to a small or medium-sized accountancy or law firm. It will outsource compliance to a support service provider, who will tell them what they need to do to comply. They will operate directly with the FSA but this is no different to being an RI in a national firm, where you have an individual excess.
I think there is also a compliance issue for networked advisers. A directly authorised firm can always keep track of all their transactions and check they are compliant. I don’t believe that a network can do this for everyone. They don’t have the technology to be able to check thousands of transactions but this would only be discovered a few years later. Ultimately, networks have diseconomies of scale and the best model is a small model.
2Plan Wealth Management chief executive Chris Smallwood
While many industry commentators have their own personal views of the real motives behind the various plans to restructure financial services regulation – and in particular within the IFA sector, a recent report from City law firm Eversheds definitely seems to have hit the nail on the head for me.
According to the law firm, the new prudential regime for personal investment firms forms part of the FSA’s plan to change the structure of the IFA industry, primarily to drive consolidation, and it does not take much of a sceptic to see that the reason for this may well be the potential to reduce the scale and cost burdens of risk management for the regulator.
With many IFA firms still choosing to stay small, independent and directly regulated, just what will the new regime mean to them? Many have done incredibly well in the past with solid and loyal local client bases, not to mention dedicated long-term staff and enviable working cultures. But, post- 2012, is it really possible to maintain this status quo or would a better resourced, safer haven be a more sensible course of action?
What nationals and networks are arguing is that given all the risk reduction requirements that now govern regulatory strategy, most small directly regulated advisers are just not in a position now to be properly capitalised. And with stretched resources, we have to accept that this means no one is properly checking substantial amounts of the new business written by such firms, especially large, complex or high-risk cases.
A “support services company” may well give some advisers comfort, with the option of increased resources on tap – for a fee – but with no regulatory accountability for that firm. The most they would do is to make comments if they check a file. The buck still stops firmly with the smaller IFA to rectify things and pick up the pieces if anything goes wrong. To combat this problem, we created our own model, which ensures that the file is rectified by the adviser and, importantly, it is us who takes the responsibility for the advice when a case comes through our paraplanning team, removing the PI excess from the IFA.
Can you imagine if the whole industry operated in this way and the effect it would have on advice to the consumer, safety for the IFA (and the firm) and the reduction in claims? Surely the time has come to seek out the economies of scale which will ultimately give us as advisers and our clients the peace of mind and quality of service which the regulator and the industry so desperately needs.