The future (and past) of networks
If you were to start an online retail business today, you would be unlikely to rack your own servers, build your own e-commerce infrastructure, or establish your own merchant banking and payment facilities.
You’d rather use a turnkey solution like Shopify and outsource all core infrastructure (eg hosting, website, inventory, banking, payments, etc.) so you can focus on what you do best and what’s most important to being successful (eg .product, marketing, customers).
The same is true when starting and running an IFA business, and networks like ValidPath provide IFAs with the essential regulatory infrastructure and back-office services they need to focus on building their business and serving their clients.
However, in recent times the network model has come under increased scrutiny due to new regulation (such as the appointed representative (AR) regime), higher regulatory expectations for supervision to deliver positive client outcomes and additional compliance requirements.
So what is the role of an IFA network today in the current landscape, and how can networks continue to thrive in the future?
The history of the network
The network model was born in the 1980s as an alternative to IFAs having to be directly authorised, instead enabling AR to advise clients within a compliant framework of regulatory oversight and specialist resources.
As an AR within a network, generally, all authorisation, compliance, professional indemnity insurance (PII), agency and core infrastructure was provided ‘as a service’, and there is no capital adequacy requirement or direct regulatory reporting obligation.
As advisers realized the benefits of a specialist B2B service provider (with greater ‘buying power’), the network model became a significant part of the market (which is not surprising given the complex regulatory landscape in which IFAs operate).
Currently around 65% of IFAs in the UK work via AR and part of a network compared to around 35% who are directly authorized.
The evolution of the network (hint: not all networks are created equal)
“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.” Often mistakenly attributed directly to the British naturalist Charles Darwin, the sentiment in this statement by business professor Leon C. Megginson in summing up Darwin is clear: adapt or you may become extinct.
In the context of financial services, most large advisory networks were founded at a time when pen and paper were the dominant technology.
From this starting point, the financial advisory market has evolved rapidly in recent years due to the convergence of technological advances, changing consumer expectations and new regulatory paradigms that have and are changing the industry. However, while there is real innovation happening in the networking space today (if you know where to look), most networking intermediaries, like dinosaurs, have not adapted. Why?
First, there is often an inherent disincentive to change based on a business model and competitive advantage derived from the status quo. Furthermore, there is often an inability to change (or indeed paralysis) based on shareholder indecision, the sunk costs and investment required to modernize and the lack of conviction to achieve the business transformation.
What this means, in the context of new regulatory requirements (such as the AR regime) and a changing market, is that their costs have increased (and their margins reduced with scale), their value proposition has decreased (and will continue to decrease ) and their ability to compete in the future is limited.
This is, in part, why we’ve seen a trend toward limited offerings, vertical integration, product-ownership dispersion, and consolidation among the network intermediary market (several legacy networks have indeed put them up for sale in recent months).
Simply put, it is difficult to foresee how an incumbent intermediary will adapt and thrive in the future if they are a monolithic dinosaur with no technology, no vision, no culture, no alignment with customers, no differentiated value proposition and no rationale for continued existence justification of the lifestyle choices or entrenched distribution of shareholders. So what is the future?
The past and future of networks
There is a growing demand for advice against a backdrop of technological innovation, changing client expectations and increasing regulation. Networks provide a valuable service to IFAs and their clients so they are well positioned to capitalise, but they are at a crossroads and the characteristics that define the past and will define the future are now clear.
The past is outdated analog processes and hacked data and the future is technology enablement, automation and open APIs. The past is a platform and product focus and the future is independence and what is in the customer’s best interest.
The past is a set-and-forget business model driven by funds under management (FUM) inflows and regulatory ticking and the future is a real-time approach to delivering positive outcomes supported by data-led insights.
The past is a monolithic structure that outsources key business functions and the future is a compartmentalized and agile structure that mitigates existential business risks (such as PII).
The past is a retirement and retirement program based on FUM and income consolidation and the future is an independent succession solution that empowers the next generation of advisors.
At the end of the day, for networks to thrive in the future, they need to be customer-centric and deliver real value, supporting the delivery of better customer outcomes to more people at greater scale and profit with less risk.
The key metric is the trajectory of their value proposition for IFAs, and specifically that it should improve over time (and with scale) while reducing in cost and complexity.
Although many strive for this, it is only possible with innovation, conviction, investment and a commitment to make financial advice better for everyone, now and in the future.
Angus MacNee is CEO at ValidPath