In 1998, on the first day of my career in financial services, my boss attempted to enlighten me on the concept of polarisation. He said that tied advisers were similar to lions in a zoo, with only a limited amount of freedom and a small area in which to operate. They were completely reliant on the zoo keepers for food and had no control over most elements of their existence.
Network members by comparison were lions in a safari park, they were free to roam wherever they like in their natural environment. There was always a ranger there to remind them of the perimeters when necessary, supplying food and water on a monthly basis and providing for the needs of the animal from a discrete distance.
Directly-regulated IFAs were the wild animals of the industry, living in the jungle and left to their own devices. They had total freedom of the entire jungle but are unprotected from any prospective predators and every day have to wake up and make a start on hunting down their own lunch.
My boss explained that it was important that advisers tell clients which type of lion they were straight away. All manner of trouble could rear its head when the client believed that his pension was being selected from the whole of the jungle only to discover it had actually been chosen in a six foot square cage. As you may have surmised from the descriptions given, when this conversation took place we were working for a network.
Eight years on, a lot has changed. Regulatory upheavals have changed the way in which financial advice is given, and the levels of support advisers need. The most notable development regarding the latter is the birth of IFA service or support companies, offering guidance to directly-regulated IFAs.
To advisers who are making a decision about whether to choose a network or a service provider, the biggest difference between the models is that a network is itself regulated by the FSA and accepts liability for the business written by its members, whereas service company members are directly regulated in their own right.
Following mis-selling incidents, the costs to networks of insuring this liability rose sharply, and membership costs rose as a consequence, as did compliance monitoring of customers. However, the actual impact of this was that all IFAs within a network were treated in the same way. Sole traders and start up companies were subjected to the same rocketing costs and entombed within the same level of regulatory red tape as IFA companies with 20 years of trading history and 30 advisers, when actually the risk they presented was not comparable.
Another reason why service companies are able to keep costs to customers so much lower than networks is the fact that they do not process their members' commission payments. It seemed strange to me during my network days that an IFA could be self-employed, choose their working hours, clients and office methodology, and yet were paid monthly by the network in the same way as us employees. Directly-authorised IFAs are much more in control of their cash-flow. Commissions are paid direct when the provider pays out. This cuts out the hassle and time restraints of having queries passed from the adviser to network to provider and all the way back through the same chain. If an IFA is considering moving from a network to direct regulation it is recommended that he chooses a service company that will help arrange novation agreements for agencies which means there will be little disturbance in income flow.
Since depolarisation last year, even my former boss would struggle to produce a suitable analogy about the layers of IFA support available. Tied adviser lions are still in a zoo but now they can also visit a multi-tie zoo with different varieties of lion to choose from. Network member lions are still prowling around a safari park, but the boundaries are patrolled constantly and the inhabitants are getting a bit fed up with the constantly changing environment. Directly-regulated lions are still roaming the jungle, but now they are in control of their own destinies.
Laura Edwards is marketing officer for SimplyBiz Services
Source Citation:"Even kings of the jungle must evolve." Financial Adviser (July 13, 2006): NA. Academic OneFile. Gale. BROWARD COUNTY LIBRARY. 30 Sept. 2009
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