Your IndustrySep 13 2021

Should you be directly authorised?

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Should you be directly authorised?
Credit: Johannes Plenio from Pexels

Opting to shelter as an appointed representative under a principal firm or network’s umbrella can be a good option for new firms, but it is not without its limitations when it comes to autonomous decision making.

“There’s certainly no doubt – particularly for those start-up advisers looking to initially establish sound working practices and build a client bank – that being an AR can help smooth the way and help in getting established as quickly as possible,” says David Ryder, head of proposition at Paradigm Consulting.

However, a common denominator in advisers moving away from this structure is a desire to have the autonomy to make all of the decisions that matter in your business, Ryder adds.

“Advice processes, choice of software tools, affiliation to mortgage clubs, to name but a few, are all down to the business owner and often the ability to be able to shop around and make these choices for yourself can lead to greater profitability.”

Richard Ardron, SimplyBiz’s marketing director, agrees that a decision to become directly authorised can be prompted by reviewing what advisers and clients need, and assessing whether the right infrastructure, skills, products and technology are in place to meet their needs.

“Networks will have certain requirements for its members in terms of operation and the type of products and services they are able to offer,” says Ardron.

“This is not a criticism, simply a fact of the relationship they have with firms and the regulatory responsibility that they take. Going directly authorised affords a firm the luxury of making their own decisions on how their business is run.”

Barry Martin, head of advisory sales at Threesixty Services, says the key business decisions that directly authorised firms have full autonomy over include: 

  • Whether they provide independent and/or restricted advice.
  • Their choice of investment proposition.
  • Recruiting advisers when it is desired by the firm but not agreed by the network.

An independent future

Martin also says a common reason for firms deciding to go it alone is that they outgrow their network.

“As their business and experience grow, it’s not uncommon for [ARs] to question whether they should be ‘steering their own ship’.

“We’re contacted by firms that feel their future and the direction of their business is being dictated to them. For these firms, a relationship which started out as being supportive, has begun to suppress their attempts to grow and innovate.”

Ardron also highlights the control that directly authorised firms have over the future direction of their business. “The market for ARs has been tumultuous in recent years, with buyouts, mergers and even, sadly, networks unable to continue operating,” he adds.

“As an AR, your individual business is linked to that of your parent company. Deciding to be directly authorised can be unnerving, but it also allows the firm to take control of its own destiny.”

Sanlam, for example, has confirmed it will be winding down its Sanlam Partnerships network, citing the “increased scale and systems capacity required” to grow a financial adviser network no longer fits with its business model. 

Meanwhile, amid an acquisitive environment in the IFA industry, Paradigm Consulting’s Ryder points to the growing trend of ‘buy to build’, with directly authorised firms being acquired as going concerns and capital injections to help business owners realise their firm’s full potential.

This is investment that an AR firm clearly would not attract, Ryder adds. But the decision to become directly authorised is not made lightly.

“We’d suggest talking to other advisers to find out the pros and cons of any course of action,” says Ardron. “Most service companies would welcome potential members to their events, so that they can both sample the quality of support available, but also engage with other advisers and ask about the things which matter most to them personally.

“Additionally, talk to the businesses from which you want to access support in the future. Any reputable company will welcome all the questions you have to help you feel assured that you are making the right choice.”

Absolute Sense, a financial planning business in Cambridgeshire, is one firm that has made the switch from appointed representative to direct authorisation.

“We felt that as a chartered firm with five advisers, a mortgage specialist and a superb support staff, we were capable of working directly with the FCA and other stakeholders and there would be a potential cost saving by cutting out a layer of ‘management’,” says director and chartered financial planner, Paul Waggitt. 

“We wanted to make our own decisions on the direction of the business, and we have achieved this by growing the business and attracting quality advisers looking for an independent home.”

Waggitt also says there has been some cost saving, which has been directed towards growing the business and supporting its staff and advisers. “It should also be noted that the hidden cost of time spent liaising and reporting to the network has been a significant saving,” he adds.

Becoming directly authorised

For firms that are considering the same move, there are potential bumps on the road to direct authorisation.

Martin at Threesixty warns that businesses will need to take note of any obligations to their network or principal firm.

“Are there any contractual restrictions because of their existing role that would restrict their ability to service existing clients? Are they required to maintain run-off professional indemnity cover post-termination, and if so, for how long?” he asks.

Another common issue that Threesixty encounters is networks effectively freezing income for a period when notice is given, Martin says.

“It’s vital to understand the terms of an existing AR agreement before a firm makes the decision to apply for direct authorisation to avoid any nasty surprises,” he adds.

Paradigm Consulting’s Ryder says stories of various hoops that companies have needed to jump through to change to direct authorisation are “numerous”. In addition to frozen payments, he cites “onerous” advice checks and contractual terms being applied “to the letter”. 

He warns: “It is appreciated that networks and principal firms have to cover the risk involved, but at times those obstacles can seem beyond necessary and firms should be aware that a ‘divorce’ can sometimes be messy."

While direct authorisation has its benefits, Waggitt at Absolute Sense says he would probably still recommend a good network for individual advisers starting out or looking for a home.

“A lone adviser cannot cover all of the operational bases needed as well as looking after the client,” he says.

Ryder agrees: “It’s certainly not always the case that the grass is greener on the directly authorised street, and for some established AR firms perhaps it is the right thing for the comfy pair of slippers to remain in place.

“However, if your business is established and you feel that you’ve potentially outgrown the network environment or your principal firm, there should be nothing holding you back, and the encouragement and tangible, experienced support you need to make that change is ready, available and waiting for you.”

Chloe Cheung is a features writer at FTAdviser