New kid on the block

The cost of regulation is the first major stumbling block for the budding entrepreneur. FSA authorisation does not come cheaply and added to that is the need to potentially provide a substantial pot for the FSCS to mop up the mess caused by the mis-selling nightmares that may well be the legacy of those advisers who left the industry when the new RDR qualification rules came into force this year.

The good guys have been left to pay for the mistakes/mis-selling of others. With fewer firms out there post-RDR, each firm’s share is inevitably higher.

Other costs such as premises, initial marketing, staff costs and the prohibitive cost of PI and other types of insurance will pile on the pressure in the early days and the new firm will inevitably haemorrhage money in the beginning. I believe that the only way to survive the first year is to have a substantial capital cushion – enough to fund your costs for the first six months at least. If you have no existing clients to bring with you when you start off on your own, you will probably need to cover at least a full year.

A critical decision when starting up is whether or not you are going to employ support staff. Doing your own paraplanning and administration may keep your overheads down, but it will seriously impact the scope you have for doing the part that brings in the income – advising clients – unless, of course, you work ridiculously long hours to accommodate both functions. However, employment brings its own set of commitments – national insurance and workplace pension contributions, other insurance and additional costs, such as IT and office furniture, must be factored in as well as the direct cost of salaries.

Another serious hurdle is the compliance requirement – which is going to take many man-hours. In a small firm there is little room in the budget for a dedicated compliance officer so typically this falls on the principal. However, it does not have to be the case. Joining a network may offer a half-way house solution for the compliance side of the business and it does work for many small firms. However, a network will impose tight controls and will, of course, have a tangible effect on your profitability. Alternatively, the compliance function could be outsourced: there are a number of compliance specialists out there who will provide an external compliance service, carrying out file checks and monitoring record-keeping on an ongoing basis.

Outsourcing key areas is perhaps the answer for other functions in the firm too. Bookkeeping and payroll are critical functions within the business, but these can easily be outsourced to bureaux if needed. Doing these functions yourself may look like it is saving you money, but if it keeps you from your clients, it may be a cost rather than a saving.

Having covered all the administrative costs of setting up a firm and keeping it running, the next big challenge is to get paid for the work you do. In the old days, commission-based remuneration made the task of collecting income simple. However, with the outlawing of commissions from this month, it has become a more complex process and not every client will opt for the client-agreed adviser-charging route, even if a product sale is involved. It is true you will be asking for a payment that has a relationship to the work you are doing, rather than basing it on a product you have recommended, so in theory the new fee-based charging structure will work in your favour.

The bad news is that product providers are using the new rules as an excuse to renegotiate their terms of business with advisers and it may be some time before wrangles about who gets paid what are resolved. The next couple of years are going to be challenging for all firms and existing firms will be relying on their passive trail income to get them through the worst.

As a new player in the industry, you may find that your influence is limited when negotiating with product providers and that you are down in the priority list for their best broker consultants and support services.

Despite all of these drawbacks, there are still good reasons why you might want to take the plunge. The freedom to be in control of one’s own destiny is always a good thing, and if you have good connections within your professional circle – lawyers and accountants – then you may be able to get yourself up and running with new clients on board quickly. If you have been left adrift after the closure of a non-compliant firm post RDR, you may have a client bank ready to sign up.

Your professional connections may give you the opportunity to set up a more formal arrangement whereby you can provide a service to their clients. Accountancy firms in particular may be happy to sign up to a formal contract where they take a cut of any earnings from clients they have passed over to you. Guaranteed client leads from a source such as this are likely to be worth giving away that cut.

Setting up on one’s own has always carried risk but by definition a financial adviser is risk-smart. He or she should be able to balance those risks against the potential rewards. However, the current economic climate, the soaring cost of regulation and the uncertainty in the industry in these early post-RDR days have increased those risks 10-fold. Any adviser going it alone without either substantial financial backing or a sure-fire bank of clients (and preferably both) is likely to struggle. Knowing what I currently know, I am not sure I would take that risk, if I were starting from scratch today.

Carl Lamb is director of Norwich-based Almary Green Investments

Key points

Becoming one’s own boss is the ambition of many a financial adviser

The cost of regulation is the first major stumbling block for the budding entrepreneur.

Product providers are using the new rules as an excuse to renegotiate their terms of business with advisers