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Taking the first steps: the risks and rewards of regulatory umbrellas

Taking the first steps: the risks and rewards of regulatory umbrellas

You have been in the industry for years, lived through changes such as the RDR and survived the 2008 financial crisis, all the while gaining experience at a large wealth manager. But now it is time to leave.

You want to be your own boss and as the saying goes be the master of your own destiny. But how can you go about it without burning through all of your cash while spending months waiting for an FCA authorisation before you can even begin talking to your clients?

Becoming an AR or independent contractor 

One route many have recently chosen is to become appointed representatives or independent contractors and use the back office and compliance functions of a service provider, such as Raymond James Investment Services.

‘We provide the whole solution, the clients, FCA authorisation and professional indemnity in addition to our administration and platform services. That is really the bread and butter of Raymond James,’ said Cynthia Poole, director of relationship management and business support.

This service has been the major contributor to Raymond James’ £27.9 million turnover in 2015. 

Going under an already established firm's umbrella has many benefits, and one that is mainly cited is the lower cost for start-ups.

For example, the independent contracting model Raymond James offers, charges 15% of a firm’s revenue. However, it also provides loyalty break points by having tiered charging. Therefore, as you get bigger, the percentage of the revenue you need to share decreases.

‘From a commercial perspective we wanted to make sure any move to direct authorisation is not financially motivated,’ Poole said.

RC Brown, which recently launched its regulatory ‘incubator’ service, charges 0.3% of assets under management for providing custody, computer systems and compliance, although this can change depending on what services are actually required.

Aside from the cost benefit, it is also the security offered that drives disillusioned wealth managers at large firms to go it alone and make use of such models.

When you set out on your own, it might be difficult to convince clients of the security of their investments. This is one of the reasons, Raj Basra, managing director of Tacit Investments – a company that was previously an independent contractor trading under Raymond James – chose to work with it.

The scale of the company and having Pershing as the custodian, he argues, gives clients a level of comfort that as a boutique may be difficult to provide from the outset otherwise.

It also only takes weeks to get up and running as an FCA authorised entity, rather than the now-standard nine months.

But why is there now a rush to join such networks?

‘I think the reason it is coming now is because we’re seeing the big firms getting bigger and there’s lots of people who are not happy at these big firms. They don’t like being shoehorned into one size fits all procedures,’ said Alan Beaney, a director at RC Brown.

‘The more concentration there is, the more encouragement they have for people to set up on their own. And it’s not as expensive as people think.’

Also identifying this opportunity, others have launched similar ‘regulatory hosting’ services, including Thornbridge Investment Management and The Whiteboard, the latter of which was set up by former Stocktrade director Matthew Collis.

Risks for principals

It is important to also consider what this arrangement means for the providers of the service as companies like Raymond James and RC Brown take on the burden of compliance for all firms in their network.

‘We are responsible for everything those individuals do,’ Poole says. ‘In the eyes of the regulator, there is no difference in someone being directly employed or working with Raymond James.

‘Because of that we do have a very thorough take on process.’

While the business development and recruitment teams talk to wealth managers in the field to determine who would be a good fit, there are several more steps before a final decision is made.

There are two stages: a desk-based assessment, which gathers information about the wealth managers’ background and experience, and a practical assessment, which includes knowledge-testing as well as a role-playing assessment.

At RC Brown, Beaney explains: ‘We have to be happy with their modus operandi, we have to be happy with their standards because effectively it’s our necks on the line.’

He added that the single biggest problem is people extracting themselves from their previous employers.

‘When people are setting up on their own, they have to think of the consequences of existing contracts, and some of them are getting really onerous – typically they will have three to six months’ notice and maybe between six to 12 months restrictive covenants.

‘That’s something they have to work out, they have to take proper legal advice and see exactly how they can extract themselves from their previous employer.’  

FCA’s suggestions for network principals

Do you have:

Enough cash flow to meet liabilities as they fall due?

A cost-management process to identify both the benefits and risks of any cost-cutting exercise?

A clear internal structure, so your people know who is responsible for what?

Systems and controls in place that ensure close and continuous supervision of your appointed representatives?

The right people with the skills and competence to carry out those roles, especially governing and control functions?

Enough evidence to satisfy yourself that your appointed representatives are offering sound advice and treating customers fairly?

A regular review of your management information to ensure that it remains relevant?

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