10 questions to make sure you choose the right network

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Choosing the right IFA network to support your business isn’t an easy decision. Get it wrong and the pain to change again can be considerable, but get it right and your network partner will help your business to flourish.

Before we go any further let me make one thing clear; not every advisory firm should be a member of a network. For some, direct authorisation is the most appropriate route, for others being a network member is the right choice. I recognise that there are pros and cons for each option, but let’s put that to one side until another day.

So, whether you are a new start business, or have many years trading behind you and have decided now is the time to change network, what questions should you be asking your existing network, or indeed one you are considering joining and what answers should you be looking for?

New Start-Ups on the Increase

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The rate of new start-up IFA practices is very much on the increase. Is this the latest unexpected consequence of RDR?

At Sense, we have supported 12 new start AR businesses over the past 10 months, more than the combined number of firms joining us from other networks and Direct Authorisation. Whilst some groups of advisers have reacted against a forced move to restricted status, in many cases the catalyst was far more subtle.

The role of a modern network

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Over the 30 years that I have been in this profession, I have watched a genuine transformation. 30 years ago, insurance companies dominated the scene and owned, trained and managed hundreds of thousands of salespeople focussed on distributing insurance products.

Today looks very different. There are less than 25,000 advisers, the majority working in small firms and their direction, training and focus is on advice not on products. Professionalism has established strong roots and the development of knowledge and expertise will continue to change our profession over the next decade.

Against this background, where does the modern network fit in?

Size doesn’t matter

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Business schools often emphasise the benefits of size. They see that large enterprises can benefit from economies of scale and that businesses who have significant market shares are often in a position to leverage that scale to obtain better prices from suppliers. It must follow therefore that a big network is always better than a smaller one?

I would reject that argument. There is an exception to every rule and when it comes to networks, smaller is most certainly better. Let me explain why.

The big, old networks were built for a different era. They developed in a period where scale gave them the power to negotiate better commission terms with providers and, as a consequence, they were less selective when it came to taking on new advisers. Profitability was sacrificed to the need to build scale and to realise a capital gain by selling to a product provider. Critically, they built their compliance infrastructure when regulatory scrutiny was much lower.

Don’t tar all networks with the Sesame brush

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I read with interest an article by Alistair Cunningham in last month’s Money Marketing, representative of a smattering of similar articles in the pages of our trade press recently.

“Networks and nationals are struggling, with no apparent end to the suffering. Record fines, management team departures, falling adviser numbers and a furious backlash against the inevitable conversion to a restricted advice model summarises a horrendous 2013”

I sat there wondering whether I’ve got a tad confused.

Will FCA Inducements Guidance halt the move to restricted?

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For the last 2 years, I have consistently warned that the anti-independence propaganda being spewed out by the big networks and nationals was driven by their addiction to provider money.

Last week’s Inducements guidance will make it far more difficult (even impossible?) for providers to pay for restricted or tied deals. The new guidance is significantly tighter than the original consultation: presumably because the FCA has finally become aware of the “dodgy deals” that were done in the run up to RDR.

Treating members fairly

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Well, there’s plenty going on in our little sector at the moment. In a matter of weeks we have seen Aegon sell Positive Solutions to Intrinsic in return for some shares and Sesame confess they’re going restricted in 2014. The latest to hit the news over recent days is Russell Investments’ acquisition of On Line Partnership. All exciting stuff!

Unless, of course, you happen to be one of the affected members thrust into that disconcerting ‘limbo’ phase. Trying to find out information from people who don’t know, or can’t say. Trying to second guess what it all means and how to steer a course through impending changes can damage your business. Disturbance and distraction are rarely welcome visitors.

The Restricted List

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Large, long-in-the-tooth networks and nationals really have my sympathy. It’s a tough old world out there for a number of the traditional big boys and there has been plenty of soul-searching going on, sparked by that nasty combination of losses, legacy issues and RDR.

Questions and commentary over Sesame’s abandonment of independence have taken up a good few column inches of late: Is it parental pressure to de-risk the business? Is it an attempt to bridge losses by taking a slice of the margin on the products? Is it just a bridge too far to put in adequate systems and controls to allow advisers to remain IFA? Whatever the truth is, I’m sure that senior management have their motives and I’m sure all will become abundantly clear in due course.

Whilst I can’t tell you Sesame’s real reasons for removing the ‘i’ word, I can tell you with some confidence that (a) the advisers didn’t vote for it and (b) it isn’t down to consumer demand. Strange world eh?

Network or Directly Authorised?

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Recently, one of my colleagues asked me if I had ever written a piece on the relative merits and demerits of being in a network versus being directly regulated. I had to confess that I have always shied away from a subject which is as nebulous as trying to write an essay on whether Liverpool or Everton are the best club on Merseyside.

The problem with the Network/DA debate is that it is coloured with emotion and a complete lack of objectivity. Can I write a piece which can genuinely be seen as satisfying those two problems? Let’s try!

The three Rs of a network’s priorities

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Retention. Relationships. Risk Management.

Building quality, lasting relationships takes time and effort. This investment at the start of the relationship pays dividends in the long run; it builds trust and understanding. Provided the service quality is there (and at the right price), this is a good recipe for networks retaining their members.

So knowing all this, what message does a network with a high turnover of ARs send?

Looking over the figures compiled by Which Network, showing the total ARs (including gains and losses) at each of the networks, it struck me that the focus for networks has to be retention.