CompaniesMay 25 2016

Adapt or perish

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The sentiment behind HG Wells’ famous quotation “adapt or perish” remains nature’s inexorable imperative and in today’s brave post-RDR environment is clearly applicable to adviser networks.

The well documented reorganisation of Sesame Bankhall, which has been a prominent fixture in the industry over the years, serves as a chilling reminder to rival firms of the importance of adjusting its pre-RDR winning formula to thrive in a new regulatory landscape.

The once profit-generating business posted a pre-tax loss of £10.2m for 2014.

The network, owned by Friends Life, switched to a restricted model in a move which ex-chief executive of the company attributed to a more intrusive regulatory approach and in response into the regulator’s thematic review into how firms had implemented the RDR.

The business later announced it would no longer be offering an appointed representative network option for wealth firms as part of a radical restructure programme that shifted focus to its mortgage and protection arm.

To cap off what was a torrid 12-month period for the firm, it was hit with a £1.6m fine by the FCA in October 2014 for setting up ‘pay-to-play’ arrangements with providers in which the City watchdog claimed undermined the ban on commission payments.

We worked out our clients were Mr and Mrs Straightforward who did not want exotic investments David Carrington

A school of thought predicted that the ban on commission for investment and retail products would sound the death knell for traditional networks.

David Carrington, Personal Touch’s sales and marketing director, said: “Networks basically had the power of collective bargaining on their side and effectively acted as an aggregator and secured better commissions for appointed representatives compared to the sum they would have received if they had gone it alone.”

Personal Touch also followed in the footsteps of Sesame by moving to a restricted model, post- RDR.

“We worked out that our clients were Mr and Mrs Straightforward who did not want exotic investments but wanted straightforward solutions,” Mr Carrington said.

“They are the mass affluent clients that the banks left behind when they left the sector. We did lose a number of advisers because of this – those who are wedded to independence, but then we knew this would be the case.”

Ex-chief executive and current chairman of the network Max Wright had overseen a controversial cull in the company’s membership by 42 per cent while hiking its fees to bolster the quality of service they provide and to reflect increases in regulatory costs.

In early 2015, Personal Touch changed the framework for membership fees to a quality-based traffic light system of red, amber and green to rate members along the spectrum of low to high quality advice. This is in addition to PI and FCA levies.

The idea is that the highest quality adviser firms pay less, according to Mr Carrington, adding there is a 10 per cent difference between the levy for those in the lowest and top quality criteria.

The network’s strategy appears to have paid dividends judging by its financial result for 2014. Pre-tax profits increased marginally to £483,176 from £482,895 in 2013, despite turnover falling to £46.6m from £51m the year before.

Sense network meanwhile has taken a different tack. Despite the heightened financial burden on independent firms post-RDR, the network has maintained this model.

Another element that has remained unchanged is its membership levy.

For an advisory practice with one adviser the firm charges £250 per month, including access to Intelligent Office and AdvisaCenta tools; 7.5 per cent retention on first £200,000 of turnover per annum, reducing to 5 per cent thereafter and an additional cost of £75 per file when pre-approval is required.

The membership fee excludes the FSCS levy, FCA fees and PI cover, which members are expected to arrange independently.

Tim Newman, managing director, said the firm has further augmented its proposition to advisers through investment in technology and research to streamline the advice process.

The development of Sense’s business model has been positive for the business financially. Parent company Sense Adviser Services’ latest financial statement revealed a pre-tax profit of nearly £868,000 – up on the £646,600 for the previous year.

He added: “We believe in sensible, carefully managed, organic growth. We have 103 member firms with no desire to become a large, cumbersome network, with top down edicts to our members restricting the way in which they advise clients.”

True Potential

In 2014, financial services group True Potential, unveiled True Potential Associate Partners – its adviser network business.

The launch of the network, which falls under the regulatory control of True Potential Wealth Management, the advisory business, took many industry commentators by surprise in the wake of the total collapse of formerly established networks including Honister Capital and Alpha to Omega, which crumbled under commercial and/or regulatory burdens.

At the time of launch, Earl Glasgow, senior partner at True Potential Wealth Management, said the introduction of RDR had make the old network model unprofitable and “unworkable”, adding True Potential Associate Partners offers a modern alternative.

Daniel Harrison, senior partner at True Potential, said: “True Potential provides far more integrated systems, processes and controls than you would typically associate with a traditional network.

True Potential provides far more integrated systems, processes and controls than you would typically associate with a traditional network

“An adviser might be viewed by some people as a salesman under the traditional model. Using technology, we have designed a service where the adviser can put the client in control while retaining full oversight and being on hand whenever the client needs support.”

The network, which operates a hybrid restricted and independent advice models, charges its members 5 per cent all-in for investment business.

The group’s strategy appears to have paid dividends. True Potential group turnover increased by 61 per cent to £44.4m in 2014 – up from £27.5m in 2013 - while operating profit increased by more than £5m to £10.6m.

Size matters

For Dennis Hall, chief executive of London-based Yellowtail Financial Planning, networks have been traditionally fixated at scale – to the detriment of the more robust and experience adviser member firms.

He said: “The problem with large network centres on compliance. They would always base their compliance process around the lowest common denominator. An adviser firm would be forced to jump through countless hoops even though everything they do is clean.”

He added: “Smaller firms are nimbler and have members of similar quality and can therefore operate a compliance process that appropriate to its members.”

Chris Daems, director at London-based Cervello Financial Planning, whose firm was formerly an Intrinsic AR, said large networks are a boon for adviser firms in their infancy.

Key Points

The well documented reorganisation of Sesame Bankhall serves as a chilling reminder to rival firms

The membership fee at Sense Network excludes the FSCS levy, FCA fees and PI cover.

The commission ban in tandem with the proliferation of third party compliance consultants has resulted mushrooming apathy to networks among advisers.

“The reason why Intrinsic worked for us is because we did not know anything about running a financial planning business and the network helped us in that regard. As you get a bit more experience of running a business, you get to a stage where you think ‘we can do it ourselves’.”

Future

Looking ahead, networks great and small are likely to survive in the increasingly challenging regulatory landscape, Mr Daems said.

He added many large networks will be forced to adopt the restricted model and become vertically integrated at the behest of their owners.

In contrast, smaller networks – typically privately held - are likely to appeal to adviser firms that are wedded to independence, Mr Daems said.

However, the commission ban in tandem with the proliferation of third party compliance consultants has resulted in mushrooming apathy towards networks among advisers, according to Dan Farrow, director of Chelmsford-based SBN Wealth Management.

On the latter, Mr Farrow added: “There is a growing trend of advisers seeking compliance support through third parties. I get the feeling that networks are becoming too rigid in what they classify as good and bad compliance. They are over prescriptive.”

Myron Jobson is a features writer of Financial Adviser