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