Will the direct route overtake networks?

The closure of Investment Strategies Limited by Bankhall has put into sharp focus the choice between network membership and direct authorisation.

The trend across the industry has seen IFAs moving towards the directly authorised route, putting more responsibility on the individual firm but giving it greater flexibility.

Berkeley Berry Birch marketing director Carey Shakespeare thinks that offering performance-related benefits is the incentive that advisers need to improve their quality of work.

He says: “There has been an increased number of IFAs showing an interest in the directly authorised route and some may now believe that DA is the most encouraging option. I believe in a system of a risk-rated matrix that will allow the better advisers to reap the benefits by paying less.”

There is a consensus among rival groups that the closure of ISL has been a long time coming as Bankhall has operated as a support service group for some time. Bankhall says it closed ISL to concentrate on its core values.

Lighthouse Group chief executive Malcolm Streatfield says: “The only surprise is that is has taken them so long to reach this decision. ISL has been in existence for around a decade but it always seemed strange to offer both a directly authorised and appointed representative route. We have been trying to encourage people to become ARs. It seems strange that Bankhall has chosen to come out of the market when people are increasingly seeking authorised representation.”

Bankhall joint chief executive Paul Hogarth says: “We want members to be directly authorised. Over the last two-and-a-half years, our ISL membership numbers have been dropping. We have been moving them over to direct authorisation and have not recruited as many new members.

“This is partly because the former direct salesforce advisers – ISL’s former feeding ground – have all more or less found homes now and also because there is competition from other networks offering directly authorised options. Also, if you want to do the job properly, there are a lot of costs in compliance and we have not taken part in the pricing war.”

What of the fate of the 638 registered individuals in the 376 firms who are now seeing their network close?

Hogarth says: “We have had a number of firms stay in ISL longer than they probably should have because they are in their comfort zone. We want to incentivise them to move. ISL has become a smaller part of what we do – it is now around 10 per cent of our firms.”

Pi Financial marketing manager John Beale says: “For some, going directly authorised will be the right move, for others, it will be a jump into the dark so they may feel the need to join forces with another network. People know what they are doing now. IFAs increasingly have the systems to conduct their business properly.

“We are looking at an industry where the one or two-man-bands might not survive. For them, it could be quite a big step but for the industry as a whole it provides a valuable lesson that you need to have a proper structure in place for a network or you will not survive. I think it suggests that you need a degree of accountability for your IFAs.”

Beale questions what this means for networks in general. He says: “We are now looking at a situation where the pyramid within financial services has been turned on its head.”

But it is clear that giants such as Sesame and Tenet will stay with the appointed representative model as it is at the core of their business plan. In theory, the AR model gives them far more control over distribution, making them valuable to product providers in the multi-tie market.

Sesame marketing director Stuart Gitsham believes that a watertight business strategy is of the utmost importance in today’s climate. He is adamant that there is still a crucial role for networks but the ISL closure has made other firms, including networks, more aware of their own business plans.

He says: “Appointed representation is a core part of our business and we offer a full service that our members value. Our mortgage and directly regulated businesses have been growing but we have had to finetune our business model to ensure continued growth. I firmly believe there is still a role for networks.”

Gitsham says: “The issue will be over sustainability. I believe that any firm needs to have had a five to 10-year run before it can claim to have a sound platform.”

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