Changing from Directly Authorised to Appointed Representative

The Financial Planning Professional: Part 5 of 6

Time to Reconsider Your Options

Lockdown has given financial planning firms the time to reconsider if their business needs to be repositioned, and all firms should be looking from time-to-time at whether they should be directly authorised or with a network. Or if they are with a network if they are with the right one.

Here is one consideration to add into the mix. The direction of travel for financial planning. What impact does the “incomplete transformation” from product sellers to professional financial planners have on the future for you and your firm?

So, before you cosy up to a large network as many are doing just now, ones that are increasingly looking like vertically integrated firms, let us stop and think for a moment about what life will be like for the professional financial planning firm if a wall was to be placed between advice and product.

The direction of travel follows the continued demand from consumers for the separation of advice from product to improve market integrity – with the conflicted payments debate – countered by the continued lobbying of the investment industry, and more recently networks, to continue permissions for vertically integrated firms.

The investment industry has fought genuine customer-focused reform at every step of the way over many years. Regulators specifically rule out splitting advice from product sales, saying the costs do not outweigh the benefits. Read, successful lobbying of parliamentarians in the corridors of power.

It is a move that would not be cheap, but not separating advice and sales has already cost the public billions of pounds.

Who will win, investment firm bosses or consumers?

The answer to that question will significantly impact your financial future, depending on the choices you now make. The decision is really quite simple. You need to choose whether you want to be a product seller or a professional financial planner.

Joining a Network or Investment Firm

The big investment firms employ investment advisers with the express aim of selling their investment products. Similarly, the big networks now own big inhouse investment platforms. These days, independence does not mean truly independent advice; and there is little to distinguish between a vertically integrated firm and a large network with their own platform.

It is challenging being a professional financial planner with such a firm. They are also very unlikely to allow you to set up a separate non-intermediating financial planning firm.

Some large networks do not allow fee-for-service pricing, and insist on asset-based pricing.

Which means, even putting advice to one side, customers cannot be sure they are being recommended the best product.

Why? An investment firm does not want its investment advisers selling another investment firm’s products, and vice-versa.

Since the Covid-19 outbreak began, many more directly authorised advisers are committing to networks and not just “window shopping”. The increase occurred during the recent months of lockdown when many firms would have been reassessing their business and financial standing. 

What networks have seen is the interest from the directly authorised space, it is probably a catalyst for firms both financially and from all the added value that good networks can bring.

Part of the driver will be financial because obviously professional indemnity insurance and regulatory costs have hit firms heavily and particularly directly authorised firms.

An investment firm or network will support all member firms through these difficult times and a lot of the network’s smaller firms with less turnover you would expect would benefit most.

But that is not always the case.

While we were stressed and anxious about lockdown, one of the UK’s largest networks decided to send hundreds of its appointed representatives, the smaller firms with less turnover, threatening letters about personal development programme irregularities.

They even threatened those having undertaken thousands of hours of CPD studying for CII exams with suspension, saying there was a failure to communicate or paperwork was not up to date.

They even threatened to notify the FCA to permanently blot the copybook for the adviser.

Advisers want to make a living, enjoy work again, without bullying, fear, and blame. What impact do you think this corporate action had on the mental health of its members in these times?

If you are making the change from DA to network, you need to be ready for this.

Lessons from abroad

A former Australian investment adviser has described the investment firm giant they worked for as a “dictatorship”, claiming he was pressured to sell in-house products, including to a client who would have been left thousands of pounds a year worse off.

The incentives the investment firm offered him to join its network made him feel like, “a corporate slut; a bitch to somebody’s command”.

“A puppet would be the best way to describe it,” he said.

In a network you will formally review your performance with your line manager and discuss ways to improve and develop. Of course, you and your line manager will have regular chats about how you are doing throughout the year.

“Somebody above me was always going to pull my strings and I was too naive to realise it, or I was too blinded by the incentives”.

The investment firm began to pressure him to favour in-house products over others in the market.

He said each time his business reviewed a client or had a new client he would send a recommendation about the type of products they needed to the investment firm’s head office.

“Every time it came back, regardless of what I had put as an investment adviser, the product at the end of the advice or the structure was the in-house product.”

“The real issue in my opinion was the fact that they were trying to get my existing book of business over to their particular products and services.”

This “didn’t sit well with me, because being in the independent market space, I already knew that there were alternative options available, and as an adviser I was utilising those alternatives”.

He said the final straw was when he recommended a long-standing client set up a self-invested pension.

He says the investment firm’s managers pressured him into selling the client an in-house pension product, which, in the investment adviser’s view, would have left the client thousands of pounds a year worse off.

When the investment adviser argued against doing so, he says the investment firm pushed back and told him in a meeting, “I will be using the in-house product, because it is in the client’s best interest”.

“Now, best-interest duties for advisers are quite simple. Whose interest is it in? This particular case it was in the best of interest of the investment firm,” the investment adviser said.

He said he resigned as an investment adviser with the investment firm over the matter.

What would happen if the consumers won?

In the face of there being a wall placed between advice and product, say in the form of FCAs Assessing Suitability 2 due early 2021, vertically integrated firms might opt for a brutal restructure of their financial planning division. That’s what happened in Australia.

If that were to happen, maybe as much as a third of member firms may be sent a shock letter informing them they would be axed within a few months.

Smaller firms with less turnover.

Where advisers bought their firms, the investment firm might also cut by almost half the amount that it would pay investment advisers to buy back their business.

The investment firm may have had an agreement with investment advisers that it would buy and sell at a generous multiple of the annual earnings of each business but may now tell them, given the changes to the world of investments, it will only pay a lower multiple of the earnings of businesses.

“Some of them, they’ve been doing this for 30 or 40 years and this has been their life, and suddenly they’ve lost their business.”

“They’re not sure if they’re going to walk away with a loan. They’re worried about their clients.”

So ask yourself, do you want to sell products or be a professional financial planner?

Contact us today to find out how the Academy of Life Planning can help you transition from Financial Intermediary to Non-Intermediating Financial Planning firm.

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