In its ninth chapter, Non-Bank Distribution, Mr Cazalet highlighted the FCA’s concerns over the viability of networks and outlined a host of regulatory threats to their business models, from the ban on generous “marketing packages” to the likely removal of trail commission in the future.
He wrote: “In general, most of the UK’s major advisory businesses struggled to turn a penny profit during the good old days when providers were chucking commission and marketing allowances at them by the sack-load.
“So how will they fare with upfront pension and investment commission taken away, ‘marketing allowances’ being curbed, and with trail commission being turned off in the not-too-distant future?”
Mr Cazalet examined the turnover and pre-tax profits of the market’s five biggest players – Intrinsic, Openwork, Positive Solutions, Sesame and Tenet – pointing out that they had collectively posted a cumulative pre-tax loss of £38m. He said that their balance sheets “looked like they have been given a good going over with an AK-47”.
He added: “If they failed to make hay while the sun shone, what is there to say they will do any better under the extremely challenging conditions brought about by RDR?”
He also said that the demise of trail would force consolidators to convert “assets under influence” into “genuined platformed assets under active administration, generating enduring ongoing revenues.”
A spokesman for Intrinsic said: “In 2012 Intrinsic reported an Ebitda profit of £5.2m. Our reported pre-tax profit for the year was £24.3m, though this figure took into account the waiver of Preference Share dividends that were charged to earlier years under the requirements of International Accounting Standards. As you can clearly see from last year’s Report & Accounts, Intrinsic did not contribute to this loss in 2012.”
A spokesman for Tenet said: “However, from Tenet’s point of view, we are now seeing positive growth, posting earnings of £1m and a net profit of £300,000 in our recent report & accounts, as well as a group revenue increase of 22 per cent. We continue to monitor the developments on trail commission and offer support to our advisers to transition to on-going service charges. It is important to note that nothing in the post-RDR world prevents the payment of trail.”
Sesame, Positive Solutions and Openwork all declined to comment.
Gill Cardy, network development director at Cardiff-based ValidPath, said: “Trouble is ahead for networks that have become reliant on marketing allowances or other contributions to their proposition. Those that provided services for “free” on the basis that it was covered by enhanced commission levels now have to reconsider how to price their services.”