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Survival instincts

Our two experts give their sides of the argument on whether firms need to be part of a large firm or if they can survive as directly authorised concerns

David Harrison Managing partner True Potential

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.

Chris Smallwood chief executive 2plan Wealth Management

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.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Sorry but would have to side with Mr Harrison on this one. Having worked on both sides, the problem with being part of a large firm are the all to often restrictions applied by the company on what you can or cannot do, or how in their eyes they see it being done. Certain of these methods are designed to protect the Firm and of course the IFA, but are not always in the best interests of the client.

    Some firms restrict sales of certain products, yet there are instances where the product concerned can still be proven to be right for the client.

    What I cannot understand is how any firm can claim that it is ‘whole of market’ if it restricts what it’s IFA’s can offer to its clients?

  2. Dont agree with Chris Smallwood when he says ‘most small directly regulated advisers are just not in a position now to be properly capitalised’. This is incorrect. The capital adequacy requirements for a small firm are £10,000 in the companies bank account. Sorry but the vast majority of DA firms have this, if not they would be trading.

    Actually this is a bit laughable as how would joining a firm which has never made a profit make you better capitalised.

    Also most IFA’s are very experienced the last thing they want is for their advice to be scrutinised by some non client facing paraplanner at their network head office.

    Talking about regulation and responsibility, most IFAs are very good at their job and have no complaints against them with a long track record of advice. Why should they be scared of being accountable and directly regulated.

  3. What advisers need today is a different solution to the networks of the past – and they will need a different solution in ten years time. Most businesses makes profits by delivering value to their customers, and then charging for it. The customer of the network or the national ifa is the individual adviser. If the network or national firm forgets that they are there to provide value to the adviser – their profits evaporate.

  4. I have to take the side of David Harrison on this one as reading all of the RDR information I believe the best way forward is through directly authorised in a company with 3/4 advisers. Why did you ask Mr Smallwood as his company is in a extremely week position and keeps asking Standard Life for more money as his model is not working. It would be far better if the company you asked at least made profit or looked like they would.

  5. Being a provider of solutions to both Networks and Directly Authorised firms (previously an IFA for 15 years both Network and DA) I think there will be a strong market for both types.

    I think David makes some great points here, and as a competitor I don’t say that lightly, whilst Chris has not made the most of the network benefits in his section. These I could mention but as a supplier to both I’ll leave that to someone with a little more intellect and motive than me.

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