Is the Complexity of Regulation Driving Out Smaller IFAs?
Businesses are rather like living organisms in that they adapt and evolve to fit the environment around them. To extend the analogy, successful businesses and species change with the environment and those that don’t eventually cease to exist.
For some types of advisory businesses, RDR was the equivalent of a meteorite, but there is still scope to survive. The most vulnerable of all business models in the sector at the moment is the IFA network, purely because many are lacking an essential feature that healthy, thriving firms all have in common; co-ordination.
Networks of IFAs which offer varying advice, have different charging structures, which may or may not be complying to regulations and which have different service propositions, will not be able to compete with well resourced and integrated firms. Unless they quickly adapt to the changing market landscape.
The regulator will be skeptical about networks where advice varies and where charging may be erratic. Clients are pre-disposed towards being risk averse and come to IFAs to limit their exposure to risk.
Without doubt, most individuals in networks do give a great standard of service to their clients, but it is the lack of standardisation and uniformity across the network that allows the exemplary IFAs potentially to be compromised.
While networks do organise compliance visits to check the quality of advice, there is an issue that within a network, the same client situation is likely to result in a different recommendation and a different price for similar work.The networks face a huge conflict of interest in that their client is the IFA and the IFA is the one who pays their fees . As the network is responsible for compliance supervision it is tempting for them to go easy on the firms that pay them the most fees.
This means that high risk investments, investment failures and breaches of compliance are more likely to occur, tainting the entire network. These kinds of arrangements once offered IFAs freedom, flexibility and independence, but in a profession that’s increasingly regulated, they now present advisors with additional risks.
What would happen if a network collapsed as a result of a major compliance issue? All the advisors in that network could wind up without authorisation from the FCA for up to a year, leaving hundreds, potentially thousands of clients in limbo.
The obvious answer to these problems is that networks need either to change themselves or IFAs need to exit them. It doesn’t make good business sense to be exposed to such a great degree of risk without a reciprocal degree of protection, however if something goes wrong ie Arch Cru they have been quick to go after IFAs for any uninsured compensation due, even though their compliance may have checked the advice at the time.
The post RDR world is a much changed place and for some networks the costs of restructuring will be too great.Unfortunately, this is the nature of the IFA sector now, regulation is not going away and if anything it will increase in the next five to ten years so if an IFA wishes to remain regulated it’s a fact of life that’s essential to get used to.
Some networks may also cease to exist following the end of trail commission as revenues are progressively squeezed. Even though these difficulties exist, there are still solutions and Bradbury Hamilton is a case in point.
We would like to speak to members of networks who are either leaving the business altogether following the recent changes or who would like to consider coming under the wing of Bradbury Hamilton.
If you would like to take advantage of our compliance systems, service proposition and charging structures but still look after the clients you have built up, we can help.
Why not contact me here, for an informal chat about your business, your network and your future.