Last week’s questions were all about whether your network is likely to survive RDR. And although a complex subject, it boiled down to a combination of capital, diversification, recurring revenue streams, operating costs, calibre of management, claims record and shareholder commitment.
The answers to the next five questions will determine the quality of the relationship you need to maximise your success.
Fundamentally, you need to be with the network that gives you the support you need to build your business. For in my humble opinion, this should be the key driver of any network; the primary reason for their existence should be “to enable financial advisers to build successful businesses”.
Don’t be seduced by the promise of building value in the network and sharing in the spoils one day upon a future trade sale or IPO. This pot of gold almost always seems to evaporate the closer you get to it. Concentrate on maximising the value of your business. Your business possesses the client relationships upon which this whole industry of ours is based.
The power is in your hands. You have the opportunity to leverage that power to create shareholder value – in your firm. In advice businesses, the key generators of shareholder value are recurring revenues and assets under administration; and the stickier they are the more value that is attached to them. You need to make sure that these recurring revenues are sticky to your firm; if you decide to move networks, or become directly authorised or switch investment platforms, the revenues need to be able to move with you. When it comes to the last one, by all means put your clients’ investments onto your network’s platform (or platforms).
Once platform re-registration happens as the FSA intends, you and your clients have the right to move the funds to any other platform you wish (as long as it is in the client’s best interests of course). In a post-RDR world, you should holding all the cards.
But anyway, on with the final five questions.
6. How are the network’s directors remunerated?
This is a proxy for “is the success of your network aligned to the success of your business?” Our history is littered with examples where this simply hasn’t been the case. As customers, we want the companies we buy from to succeed and their leaders to be remunerated accordingly. We don’t begrudge Richard Branson his wealth, we applaud it. He has taken enormous risks, turned industries on their heads and we have all benefited because of it. But we resent it when companies succeed in spite of their customers. This is why bankers’ bonuses make us all so mad. Businesses should add value to their customers as well as their shareholders.
So, is your success crucial to your network’s success? It should be. One way to judge this would be to look at director’s remuneration. If their bonus and long term incentives are purely based on profit then, Houston, I think we have a problem. Whilst profit is important, the long term shareholder value of both their business and yours will also be based on recurring revenue and stickiness of business (in their case, stickiness of your business). Therefore, I would want my network’s executives to be incentivised on customer service, claims record, recurring revenues and assets under administration; the same things that will generate value in your business.
7. When it comes to PI insurance, are you costing me money or saving me money?
One of the biggest advantages of being in a network is that (usually) it means you can get access to PI insurance. With several insurers having left this market recently, I strongly recommend taking a close look at the PI insurance on offer from your network and make your own mind up as to how well it will stand up to scrutiny when needed. And of course, run-off insurance for when you retire or leave the network is also mandatory, but is this cover still valid if your network ceases to be?
But does being part of a network make PII cheaper or more expensive? Inevitably, some part of your premium will be paying for the fact that the network is still on the hook for cases that were sold years ago, even though the advisers in question have long since left the network. For some of the largest networks, these numbers can be quite staggering. In this case, big may not necessarily be beautiful, for this unknown liability is the largest destroyer of shareholder value.
This is why, sometimes, it may even be cheaper to get PII yourself rather than through your network. I spoke to the CEO of one of the largest IFA firms who found precisely this; his claims record was better than his network’s so his PII premiums were cheaper if he dealt with the insurers direct. But be careful; this doesn’t work for everyone. A number of smaller firms will find that their PII premiums are significantly lower through their network and for some others it may be the only way to obtain it. Some networks bundle it all up I the network fee and some find it commercially difficult to pass on the entire FSCS levy to their members as well. So for smaller firms, the cost advantages of being with a network when it comes to PII and FSCS levy may end up being significant.
8. Why shouldn’t I become directly authorised?
If the network pays you your revenue, are you really a stand-alone business? The network should be your provider, not your paymaster. I know this is far too simplistic but there is still something in it. However, I must admit, networks offer a compelling proposition to Principals who see genuine advantage in outsourcing their compliance and back office, and don’t have access to capital or who wish to use scarce capital more effectively.
The IFA CEO above swore blind that he would never be directly authorised for two key reasons: firstly, the network shares the burden of any mis-selling claims, and secondly he sees real value in having an external compliance department. He said that the network’s compliance director had saved his business many times over the last twenty years, by preventing him from succumbing to the call of immediate revenue-generation with what turned out to be the wrong products for the wrong clients at the wrong time. Mind you this glowing view of compliance can often only be seen with hindsight – he was sticking pins in little compliance director dolls at the time!
In the past, I had felt that to build genuine value in your business, you should be in full control of your destiny, which to me meant DA. But RDR may change that. If your clients and their investments become truly portable, the benefits of being in a network may start to outweigh the cons for an increasing number of advisers. The last decade has seen a mass migration of advisers from networks to directly-authorised. A large number of IFA networks have disappeared or have become a shadow of their former selves. Will we start to see a swing in the opposite direction post-RDR? The networks I have spoken to are convinced we will. However, Aifa/Apfa is yet to see any conclusive evidence of this. The jury is out. But it remains a damn good question to ask your network!
9. What happens to my trail commission if I leave?
In the past, some networks overtly declared that they “owned” your clients, which was palpably ludicrous. Others retain the right to market to the clients after you have left. Some still make a distinction between “good” and “bad” leavers; withholding commissions as long as possible to prevent “claw-backs” turning into irrecoverable debts. I can understand this, but it needs to be proportionate. I recommend checking all this out before you sign on the bottom line. I know it is a bit like agreeing the divorce settlement before you have even consummated the marriage, but this is one instance where checking out the “pre-nup” before you walk up the aisle may be a good idea.
10.What is their technology strategy?
If the answer to this is “we plan to build it ourselves” or “we have taken a proven system and we are tailoring it to our unique needs” … run a mile. You want a robust sales process to make sure you provide your clients with the maximum amount of clarity upfront whilst protecting yourself against misunderstandings and potential future claims. There is an increasing number of proven point-of-sale, need analysis and CRM systems on the market – choose one and adapt your processes accordingly. Don’t let your network do it the other way around. They aren’t an IT shop. They need to stick to what they are good at – compliance, servicing and developing advisers, capital management, commission/advice payment management, communication, negotiating with providers and ensuring you have the best propositions available.
And lastly, we come back to where we started. The key question you need answered is “How can the network help my business to become outrageously successful?”
And this of course depends upon what you need. If you want to grow through acquisition, how can your network help? If you want to be able to sell your business at the appropriate time – how will they assist? How will they help you build recurring revenues? How will they help you diversify your revenue streams? How will they help you find new recruits? How will they help you design and define the service propositions you deliver to your clients? Will their technology help or hinder?
And more often than we may care to admit, it comes down to people. How well you trust the network people you will be dealing with and, in a mirror image of the relationship you have with your clients, do they treat you like a customer?
Campbell Macpherson is managing director of consulting firm Campbell Macpherson & Associates. His career has included executive roles in Openwork, Zurich and Sesame