Being part of a network could actually cost advisers their livelihood, writes Sheriar Bradbury
As the dust of the Retail Distribution Review settles and the watchdog continues to clamp down, advisers are increasingly questioning whether a network really offers the security they once thought.
I recently spoke to an adviser who told me that as a result of Arch Cru exposure, his network debited his account by about £250,000 in respect of professional indemnity insurance (PII) excesses – a figure he cannot afford to pay. Unfortunately, his network contract means he is personally liable.
Had he been directly authorised – rather an authorised representative – it is extremely likely that had he closed his own limited company, he wouldn't have faced personal liability. It's a tough pill to swallow but one we will see happen again and again.
Biting off more than you can chew
Advisers have traditionally been drawn to networks because of their so-called safety and protection from dealing directly with the regulator, which can be appealing for those starting out or those daunted by compliance. But such stories beg the question: how secure are they really?
If something goes wrong with an investment, advisers are a lot more vulnerable than they think. Over the past few years, we have witnessed networks disappearing and they will have inevitably taken some advisers down with them through no fault of their own.
Many networks operate with large PII excesses, the size of which advisers have no control over. This is caused largely by the burden of large historic potential advice liabilities.
By signing on the dotted line, they agree to give personal guarantees which could leave them personally liable for possibly substantial sums.
Better safe than sorry
Advisers would be wise to look at what it is they are actually paying for, insist on information about who pays for what and get a copy of the networks' PII policy.
Furthermore, if a network goes down, advisers will instantly lose their registration so are unable to advise their clients until they can be registered elsewhere. I suspect more advisers will become directly authorised and use support services over networks.
By using a support service, advisers can pick and choose the elements they need tailored to their own personal circumstances, while ultimately retaining control.
I fear we will see huge problems brewing with networks beneath the surface; if I were an investor, I certainly wouldn't wish to invest in a network. Networks must reinvent themselves if they are to keep pace with the changing landscape and not fall by the wayside.
In the meantime, advisers should think very carefully before agreeing to work under a network. It could be a mistake that costs them their livelihood.
Sheriar Bradbury is managing director of Bradbury Hamilton
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