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Tim Newman: Why the traditional networks are abandoning independent advice

Some thirty years ago, Ken Davy came up with the concept that small independent advisers could get a better deal for themselves if they banded together and increased their bargaining power with life insurance providers. Thus the first networks were born.

Early networks existed solely for the benefit of their members and, as the old direct sales forces were dismantled one by one, they grew and thrived. Even the advent of the Financial Services Act and their transformation into regulatory umbrellas did little to halt their rise.

But slowly and surely, the gloss started to rub off. Virtually all were fined for pension review problem and adviser numbers started to fall away as PIA rule changes made it easier to become directly regulated. Finally, as the worst failed and were swallowed up by others, a smaller number of big networks emerged, funded by life companies desperate to control their main distribution channel.

Today, these leviathans are finding it difficult to make the kind of returns that their provider shareholders demand and many are making significant losses. Stricken by increasing complaints from business written at a time when compliance standards were lower and hamstrung by inefficient business processes and expensive management teams, these large networks are now searching around for ways in which they can re-invent themselves for the post-RDR world.

Virtually all are embracing technology as a way of reducing costs, increasing controls and improving efficiency. Some have even seen their “investment in technology” as a way of increasing charges to members.

Many see restricted advice as a way to reduce their regulatory risk and thereby the costs associated with managing that. The eagerness of life companies to become one of the “panelled” companies has, according to the FSA, led to some buying up places on restricted panels. And the cash that has changed hands means that independent advice is not important to them and, perhaps more fundamentally, the raison d’etre of the old, traditional networks is no longer to benefit their members but to pursue financial gain from wherever it may be obtained and at whatever cost to its members and their clients.

Some have gone further by extending their influence and control over a greater part of the value chain. They have taken advantage of the vertical integration rules to launch joint ventures to provide their own platforms and collective investment funds. As none of them has yet managed to find a way of persuading IFAs to use these “owned” services, we are now seeing the emergence of tied network propositions where advisers are compelled to use the narrow range of products owned by the network. Is there any greater abandonment of their role in supporting high quality, independent advice?

These new models carry with them some significant risks;

  • Whether advisers will be prepared to give up their independence

  • Whether clients will be prepared to accept solutions which, in some cases, are materially more expensive than those available from the wider market

  • Whether the FSA/FCA will allow what some consider to be a breach of the adviser charging rules via “owned” platforms and funds

  • Whether the perceived reduction in regulatory risk actually materialises

For me, the biggest long term flaw in their thinking is that none of the “new” initiatives have anything to do with improving the experience of their customers, i.e. advisers, or the outcomes for the people who invest in their products, i.e. consumers. All of these “new” initiatives are ways to charge more, reduce network costs and increase profitability.

Some will argue that all of the above is simple commercial sense. I would argue that it is commercial expedience driven by a lack of decent alternatives and enforced by the shareholders’ desire to see an adequate return. In the end, it is the customer who decides with whom they wish to spend their money and businesses who design services purely for their own ends usually fail.

We firmly believe that success, whether that is measured in growth, profits or the value that we add to clients, is the end result of doing the right things really well. Time will tell whether the old, traditional networks can find a new model which works for everybody but I suspect that, for some and regrettably for the good firms that they purport to serve, the sands of time are running out.

Tim Newman is managing director of Sense

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. sadly, this article hits the nail on the head. what is worse is that they often try to pull the wool over advisers eyes by saying that it is in an adviser’s best interest as well !

    vote with your feet and your wallets

  2. Excellent article. Anonymous, it’s ok saying walk but walk where??? The choice and options are becoming less and less as the commercial out way the ethics. Another ‘unintended’ outcome of RDR!

  3. Hear, hear. The cynicism of the proposition I have been offered (as an IFA of longstanding with a loyal client bank) by my national IFA network, is breathtaking. It’s downright dishonest, but has been facilitated by the muddle and confusion which is apparent right now, following a change which was supposed to benefit clients. Yeah, right.

  4. Well said Tim – the time of the ‘traditional’ network is coming to an end, let’s hope you and a select group of quality networks (we need a new word to describe you now) continue to flourish and provide the kind of service those remaining post-RDR deserve.

  5. Far from thinking my network is defunct and not fit for purpose, I have had nothing but a good experience with them since I joined in 2011 after first retiring from my previous firm, they have provided in depth training to enable me to get the level 4 qualification, which I hope to achieve in the next month or so, and ongoing compliance and back office and para planning support which without a doubt is first class. The directors have been very understanding and supportive of my personal circumstances in which my wife was recently diagnosed with ovarian cancer and had to undergo chemo and operative treatment and I cannot praise them highly enough.

    I will do everythng in my power to match their consideration with my hard work and due diligence so that at least from my end, they don’t have to worry about potential client complaints as there will be none.

    well done guys keep up the good work

  6. Shareholder returns! Profitability! Pricing that actually reflects the costs of delivering a service! Adopting technology to improve efficiencies and reduce risk!

    Quite why any business in whatever sector wouldn’t have these objectives in place from day one is beyond me.

    Why would anyone procure services from a business that didn’t have these as corporate objectives?

    It is only because these firms have been run so badly in the first place, with no commercial consideration and acumen, that the changes being put in place now seem unfair to the members, and as an opportunity to their competitors. I am assuming Tim Newman works for a competitor?

  7. The reason ‘these firms’ are abandoning independence is that they only played with the concept in the bad old days. They operated panel systems propped up by huge bribes from product-providers, and marketed that as independent research to their Appointed Representatives. The model was never going to be sustainable in RDR world, and (from our own enquiries) product providers were becoming increasingly irked by the escalating demands for cash before they would be considered for inclusion on the panels.

    There is a ‘real cost’ to delivering decent, whole of market, independent advice – and these big firms had never really engaged with it in the first place. This meant that they would either have to charge for it, or cave in to the restricted model – which is what we’ve seen happen. I am encouraged to see that there are other Networks, such as ours, which steadfastly resisted this kind of approach.

  8. @Bert Poppins thanks for your response. The older networks are built on poor foundations and they have managed to expose themselves to an increasing number of problems over the years. At some point, these issues snowball to the point that suddenly doing the right thing won’t cut it.

    So, I would argue that these are not prices that reflect the cost of delivering a service, they reflect the costs of past mistakes and the unsustainable cost base that the old networks have.

    Sense is independent so that our members can be. We see a long-term disadvantage to offering restricted advice which is why we embrace independence – acting in our clients’ best interest is in our best interest.

    Sense’s turnover and profits grew by over 25% to 31/5/12 and are on target to increase by at least the same percentage this financial year. All of this has been achieved without resorting to the kind of business plan which some of the old networks are pursuing and without the customer detriment which goes with it.

    There are some have to sell their souls, and some that don’t.

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