'Perfect storm' leads to surge in advisers joining networks

Quilter Financial Planning figures show a 60% spike in the number of firms wanting to join the network in the past 12 months compared to the same period 12 months earlier.

Quilter head of recruitment and acquisitions Scott Stevens explains that a growing shift to joining networks was "fuelled by [the fact] it's becoming harder and harder to run a directly authorised business".

"I think there will be a necessity [to join networks] because the paperwork now that surrounds retaining the independent financial adviser moniker is enormous," he continues. 

"We are seeing more interest than we've seen before in terms of joining us as a network, particularly because we offer all the compliance and all that paperwork - we effectively take care of that for a financial adviser practice. We do all the research for them, which keeps them safe, we give them the back-office administration systems."

Stevens adds that post retail distribution review (RDR), there was a "perfect storm" of elements combining that made being independent more difficult.

Professional indemnity (PI) insurance premiums rising by up to 400%, mainly due to increased risks associated with advising on defined benefit transfers, has meant firms require more capital.

"The regulator is trying to do the right thing [by] asking the businesses to be better capitalised to protect us as an industry," he explains.

"But the unintended consequence of that has been the insurers have looked at that and said ‘i'm going to increase your excesses [and] the number of areas exclusions that we're not going to cover and your premium is going to go up'. It has created what you might describe as the perfect storm."

The Financial Conduct Authority's (FCA) Senior Managers and Certification Regime (SM&CR) also adds pressure on smaller firms, who need to appoint compliance officers to face regulatory challenges.

Penney Ruddy and Winter director and Chartered IFA David Penney says this responsibility was one of his biggest challenges.

"One of the hardest things about being directly authorised is taking the compliance responsibility. If you've got a one man band or a small firm someone has got to be the compliance officer or you've got to assign someone external who is willing to carry the can, which can be quite difficult," he says.  

Penney launched his firm in 2013 with three other partners. He said without that support, he would struggle to become directly authorised.

"If I was in that situation today unless I found other people I could work with, it's not realistic. You need at least six months of expenditure because have no income and you're waiting for the FCA to authorise you - the process is really complex," he adds.

Independent v restricted

Penney says if his firm were opting to join a network, he would steer away from restricted or vertically integrated firms.

"If it's part of a vertically integrated project to hoover up directly authorised firms into a network, it is ultimately it's problematic for the clients because you're potentially creating more of a distribution network for that vertically integrated firm's product. This could lead to less independence, which is not necessarily the more suitable product for the client," he argues.

But Quilter's Stevens says advisers who went down the vertically integrated path save a lot of money and time.

"In terms of the servicing cost of that book of business, it's cheaper to do that than if you're an independent financial adviser because you're having to research the whole the marketplace," he says.

"We spend over a million pounds a year on researching the very best solutions for our advisers within the network. If you're an independent financial adviser, you're going to have to do that yourself."

Stevens acknowledges the argument that independence is superior to restricted models in financial advice, but argues a lot of IFAs are restricted in the way they advise clients.

"There's a lot to be said for the psychology that sits behind being wedded to this moniker that says, 'I'm an independent financial adviser'. I would say that many of those advisers aren't truly independent," he says.

"They're not reviewing the marketplace every time someone like you comes along and says, 'we're going to start from scratch'. They will rely on their centralised investment proposition.

"They look at the whole of the marketplace and have whittled it down to these products they think are suitable for people coming to see them - that's no different from anybody who's running a restricted model."

Stevens says Quilter invests heavily on a team that meets with fund managers and product providers, to work out which funds work best for different clients.

He adds: "I feel that since RDR, there's been this whole independent is good and restricted is bad. That's just simply not the case, particularly when you look at customer outcomes.

"There are some fantastic independent financial advisers out there who do research the market place and do an absolutely fantastic job of doing that. But I would equally argue there are some who are wedded to the title that says independent financial adviser, but if you look at their buying behaviours, they're running a centralised investment proposition, I do think there is a disconnect between people's belief of what independence really means, there's a misunderstanding."

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