‘Old-style’ networks dogged by ‘dodgy deals’ and legacy advice issues will die off, according to Sense managing director Tim Newman, who is bullish about his new model network’s chances of survival.
Networks have been severely bruised by the commission ban, increased regulatory scrutiny and, most recently the Financial Conduct Authority’s (FCA’s) paper on provider payments in January.
However, Newman (pictured) believes Sense, which he set up in 2007, will not be affected by these headwinds.
Valuable place for networks
Although critics have predicted the end of the network model, Newman is adamant there is still a valuable place for networks that shun the historic focus on scale and concentrate on providing a good service to their members.
‘One key difference between us and the traditional, older network model is that we don’t have any dodgy deals with providers,’ he said. ‘There are no legacy advice issues and no regulatory problems, so we haven’t had to deal with the problems facing some of the other networks.
‘I think there’s a difference in culture as the old models came from a world of commission clubs and aggregation, and have been driven by the top line. In terms of the modern networks, they look more at the value of the services for their members,’ said Newman.
‘I think we will see the death of the old-style network model. They’ve been in decline for some time and it seems they are being challenged at every turn.’
A grown-up business
Newman said strict controls have allowed the network to stay independent as he did not want to have to treat appointed representatives (ARs) with kid gloves.
‘We want an adult relationship with our appointed representative firms, not a parent-child relationship, which comes down to the quality of membership. If you select firms that understand risk and what quality advice is, then you’re singing from the same hymn sheet and working as partners,’ he said.
Although there has been a shift towards restricted advice across the whole advice profession, most notably with fellow network Sesame’s decision to ditch independence last month. However, Newman believes there will always be an appetite for an independent network.
Independence can thrive
‘Sesame’s decision to go restricted is saying “you [advisers] can’t cope with this, therefore we’re restricting what you do”. I believe networks that support independence can thrive in this environment; there are definitely enough advisers who want to remain independent. There is a proportion of the market who are absolutely passionate about remaining independent and that will remain,’ said Newman.
The network’s loyalty to independence means it has snubbed the idea of launching its own products or platform; something a few of its rivals have done in recent years.
Newman said that Sense having its own products would undermine its independence.
‘We have no desire to go into the manufacturing space and launch our own products or platforms. As soon as you put something in like that, judgement becomes distorted and conflicts arise as it’s clear you have a vested interest in these income streams,’ he said.
‘It undermines independence. If you have your own products it’s obvious this has to fetter or influence distribution in some way. It just isn’t what we’re about.’
Sense was also quick off the mark to make changes following the FCA’s inducement paper, published in January. The network altered its policy on hospitality to make sure providers sought approval from Newman or commercial director Steve Young before offering this to members.
Crackdown on hospitality
Newman said the regulator’s crackdown on provider hospitality was the ‘most profound’ thing to happen to networks since the retail distribution review deadline and that it would catch out businesses stuck in an old world mindset.
‘It is the most profound thing to happen and the big question is: who will be profitable without these payments? For those businesses that have been reliant on those provider payments, they’re left with some stark choices: to look at their existing infrastructure and rationalise the cost base or increase the cost to advisers for their services. It’s likely we’re going to see both happening with the larger, older networks,’ he said.
Newman has ambitions to grow the business organically over the next year when it comes across quality firms. He hopes to increase adviser numbers from 200 to 240 by the end of 2014, and appointed representative (AR) firms from 75 to 100 by the end of May 2015. However, Newman said its AR selection process was pickier than that of its rivals and contrasted it to the ‘scale for scale’s sake’ approach of traditional networks.
As the network settles into 2014, Newman views auto-enrolment as an opportunity for Sense’s ARs and is trying to establish a referral service between members.
The network had 21 companies sign up to its auto-enrolment support services proposition, which includes Steve Bee’s Jargonfree Benefits software and access to the Pension Management Institute’s auto-enrolment qualification. Sense has asked the 54 remaining firms in the network that have decided not to take part in auto-enrolment to refer any workplace advice to these 21 companies.
‘We have 21 firms committed to the auto-enrolment market, each signed up to using Jargonfree Benefits under our subsidised group arrangement. Last month we had 91 advisers and staff sit the Pensions Management Institute’s auto-enrolment qualification, which is a real sign of their commitment to professional standards,’ said Newman.
‘We are encouraging wealth management firms that do not want to get directly involved in auto-enrolment to refer clients to the firms that do in an affinity-based relationship. Plenty of wealth management clients also happen to be employers or directors. Advisers need to face up to this and either skill up or refer. You can’t stick your head in the sand and ignore it.’
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