Will depolarisation kill networks? This is going to be one murder investigation that is not going to be too hard to solve.
The simple fact of the current market is that the network sector relies on commission override. There are some operations that are fixed-fee operations but still very few.
The clear steer on which way networks will go has already been given with most saying they are “keeping their options open”. In other words, that they are going to enter into negotiations with product providers to go to a tied status.
Network problems with CP121 -independent advisers
If the network remains fully independent then it will have to charge its override against both fees and commission received as an offset.
Realistically, offset will require the practice to receive all the commission income and then deal with it appropriately. It is inconceivable that an override can be lopped off and a net figure sent. The client will contract with the authorised person, that is, the network.
The re-charging will be VATable and the disclosure requirements will make the collection of fees very much more difficult.
The other big problem will be the viable argument that a lot of advice is generic and therefore not, strictly speaking, a regulated activity. No regulated activity, no charge from the network.
The only model on which fully independent advice within a network will be viable is by charging fees. On any reading, this will be nowhere near the charging rates of override. The logical conclusion is that network earnings from true IFAs reduce drastically.
The knock-on effect is that the network will then have little resources to bolster and grow its compliance and T&C services.
All in all, being true IFAs will be an uneconomic proposition. I cannot see that this option is viable for networks and I would be very surprised if a commercial profit-making organisation would be prepared to run this model.
The only other option is that the network is acquired by a provider which, with the abolishment of RU95 and the “better than best” rules, runs the network on a not-for-profit basis. Only a small number of providers could achieve this as the mainstream providers will favour tied or distributor-based sales channels.
Authorised financial advisers
Apart from the fact that this status reflects the status quo in the nearest possible terms, it is flawed with dangers. Why accept a 15 per cent override when a product provider will tie with you and allow you to do business with limited advice liability and reduced or sub- sidised overheads?
A network offering this status will have to measure up against tied and distribution agreements which will offer a better commercial deal. This model assumes that networks can survive competing with providers whose modus operandi is the sale of products and funds under management. Surely, a small override will be so attractive that advisers who are not “independent” will vote on a commercial basis.
The problem with this is that it is going to be difficult to impose a panel of firms on to a mass of advisers.
The other difficulty is that no one provider is going to want to share its distribution channel with another provider. Product providers do not work together well. It is inconceivable that a provider will stump up hard cash for an equity stake to put into competition with others. This model is flawed as its one-size-fits-all approach will not work with groups of people.
This is the only real option for networks. The reality is that, with the ability to host other providers' products, the tied agreement is, in effect, a distributor's agreement without the compli-cations.
By being tied, the compliance requirements and T&C issues are all neatly stored in one place.
The providers are likely to buy up networks in order to ensure they are guaranteed a distribution channel.
Ironically, many providers which shed their direct salesforces may find that they get their advisers back by buying a network.
The other major issue is that the business that will be bought will be that of the network company. The cash generators in the member firms will receive very little while the deals are done one level up.
Economically, this is the only model which on a hard-cash-based analysis works well with a network structure.
Many network members will be concerned as to what they should do for the best. Simply, the answer is decide what you want to do and then build your plan around it.
The polarisation issue has wrongfooted many providers and networks. The chequebooks will wave and trade sales will occur left, right and centre. Be aware that as a member of a network you do have a choice. That is, after all, what networks were set up for to provide you services and freedom.
Gareth Fatchett is principal at financial services lawyer Armstrong Neal Financial Solicitors and a director of ProAct