Leaving a network can prove a daunting and painful experience for a small advice firm.
Network contracts seem full of costly conditions for firms looking to leave, with advisers finding themselves taken by surprise by some demands and left with little room for manoeuvre. There are plenty of anecdotal horror stories out there, so New Model Adviser® contacted some networks to find out what terms they impose on leaving firms, and asked IFAs why they did not see these restrictions coming.
Networks provide a package of services to the firm that typically includes compliance support, plus a combination of investment solutions, administration, professional development, marketing and technology support.
In return the advice firm’s income is usually drawn centrally into the network and then distributed back to the advisers minus the network fee.
Most networks said they required a three-month notice period before an advice firm could exit and for that period the network would withhold income. However, advisers can end up with no income before they become reauthorised.
One adviser told New Model Adviser® his network immediately switched his firm’s income off over what he described as a misunderstanding. He said the action as ‘ruthless.’
When another adviser decided to leave their network they said the process took 10 months. This was largely due to the administration process required to direct payments from the product provider away from the old network and towards the new one.
The real shock was finding out they would have to indefinitely pay for run-off cover for advice given while working in the network.
‘My contract stated I had to continue paying run-off cover indefinitely,’ they said. ‘How long is that? We do not have a long stop.
‘The insurance broker I was encouraged to use is an appointed representative of the network and he did not flag up there would be a conflict of interest, but when you have professional indemnity [PI] insurance the only insurer that can provide your run-off cover is the original insurer.’
This means the adviser could be paying thousands of pounds a year for run-off cover to the broker, and by extension to the network, for the rest of his days.
Terms and conditions
Some may argue these outcomes should not come as a surprise to an adviser if they were all there in black and white on the day the network contract was signed.
Simon Goldthorpe (pictured above), executive chairman of The Beaufort Group, said his network was flexible and transparent in its dealings with advisers. He said some advisers have shown a lack of diligence.
‘There is a huge amount of due diligence that advisers need to do on platforms,’ he said. ‘But when it comes to networks, a lot of advisers do not take the same care or do not notice the issues if they change their minds and decide to leave that network.
‘They should read the contracts. I suspect what happens with a one or two-man band is they go down the appointed representative route, they do not look at the conditions and they do not get a lawyer to check the contract,’ he said.
But can advisers tell a good contract from a bad contract?
The adviser faced with indefinite run-off cover payments said: ‘Networks are using the vulnerability small businesses have of wanting to join them quickly and being quite smoke and mirrors with it.
‘We [advisers in general] do not read the contracts but then I do not know if we really know what good looks like either.’
The adviser said individuals and businesses can feel a time pressure to join networks, which is when important terms can be overlooked.
Leaving on good terms
We approached 11 networks, of which four were not prepared to discuss the conditions they place on firms looking to leave.
New Model Adviser® has laid out the terms of the seven networks that were happy to share those details: Beaufort Group, Best Practice, Intrinsic, Tenet, Sesame, Sense and Sanlam.
Openwork and In Partnership would not respond to requests for comment, Tavistock said it did not have anyone available for comment and Caerus had not responded at the time of going to press.
St James’s Place, despite having 3,378 appointed representatives according to the Financial Conduct Authority register, does not believe questions around notice period, adviser income and exit charges are relevant to the company ‘because it is not an IFA network’, according to a spokesman.
Of the seven that did respond, Best Practice and Beaufort Group were atypical in not requiring firms to provide three months’ notice of leaving. Both said they required firms or advisers to conclude outstanding requirements.
‘Assuming all matters are concluded, we are happy to conclude the process at the convenience of the departing member,’ said Best Practice compliance director James Lasenby.
Best Practice and Beaufort were two of four firms that said they did not switch off income for the period before an advice firm left their network. The other two were Tenet, which has a minimum three-month notice period and Sanlam, which has a maximum three-month notice period.
Last year Sanlam launched a ‘hybrid’ network model, Sanlam Wealth Planning, where appointed representatives become partner firms but retain their own branding.
Sanlam Wealth Planning chief executive Alex Morley (pictured above) said the company would assist with growth, with a view to creating an exit for the principals in approximately five years. It does not process client fee payments but leaves them to be paid directly to the firm.
There is an array of different models available to firms that do not wish to or cannot go directly authorised.
Advisers should look closely at their contract for additional charges at the point of leaving.
Cost of separation
An Intrinsic contract seen by New Model Adviser® states an existing firm may be liable to pay a fee to cover the cost of providing PI arrangements, which could work out as the equivalent of a maximum of 12 months’ membership fees.
An Intrinsic spokesman said: ‘Exit charges may apply according to the firm’s membership contract.’
Best Practice said it did not impose what it called ‘financial penalties on departure’. Beaufort Group said PI insurance and Financial Services Compensation Scheme fees would be paid prorated if they were due. Sanlam and Sense also said there was no additional fee on leaving.
Sesame said it applied an exit administration fee of £250 + VAT. Tenet said on top of any outstanding fees or loan payments due, member firms must pay a £500 network resignation fee to cover the administration tasks involved in leaving.
New Model Adviser® asked all the networks how long it took to complete the file checks necessary before a firm could leave a network. A hold up at this stage, when income has been withheld, could make a business impossible to sustain.
All seven that responded said they expected to complete file checks, known as exit requirements, within the notice period they asked advisers to give. This is typically around three months. Sanlam, Sesame and Sense said there should be no delay because files were checked on an ongoing basis.
Phil Bray (pictured below), ex-Sense head of marketing and now director of consultancy The Yardstick Agency, said a set notice period was practical for both parties.
‘If an adviser has decided they do not want to be with a network, the network should do the right thing and allow that adviser to leave on good terms,’ he said.
‘The notice period should be to ensure that both sides have time to organise the divorce. The notice period should never be used to hold the adviser to ransom,’ said Bray.
Tenet said this was why it could be useful to extend the notice period if a firm was going directly authorised rather than becoming an appointed representative elsewhere.
‘A firm in resignation can extend their notice period if they need to,’ it said. ‘This is helpful if they decide to go directly authorised and are liaising with the regulators about a start date.’
It is clear advisers must take more care when signing up with a network.
However, networks should be fair and open with advice firms and not blind them with urgency or smoke and mirrors.