There are certain topics which get our profession hot under the collar:
- Active v passive
- Displaying fees on websites
- Network v direct authorisation debate
It’s probably the last of those which raises more debate, emotion and subjectivity than any other. Being a chap who likes a challenge, I thought I’d have a go at addressing it.
Before I do though, I should lay my Beaufort cards on the table; I’d hate to be accused of bias. We are one of the few organisations who can be truly agnostic in this debate. We offer services to firms who wish to join us as appointed representatives or on a directly authorised basis. I believe that allows me to give a balanced view.
Whether to join a network, or seek direct authorisation, is the toughest decision that owners of advisory firms face. It should be approached with an open mind and only agreed after dispassionately weighing up the evidence. I’m afraid that all too often, emotion and subjectivity takes over.
Take to social media or any financial services forum and it won’t be long before you find advisers suffering from a bad dose of ‘confirmation bias’, who are quick to berate networks. Often with little evidence, or using historical poor practice to damn the whole sector. I’ll happily admit to feeling my blood pressure rise a few notches when I hear some of the common myths repeated without challenge.
I firmly believe that for many firms a network can be the right home, especially if the advisers, or team involved:
- Don’t have the skills, time or desire to take on the CF10 role; the seriousness of which often gets underestimated
- Don’t have access to the required Capital Adequacy, or who, frankly, have better things to do with £20,000, or more
- Want to outsource certain tasks such as fee reconciliation, case checking, training & competence, and so on, allowing them to focus on what they do best; giving advice to their clients
- Need additional support growing their business
- Need, for whatever reason, the quickest route to authorisation
There’s no doubt that for many firms, direct authorisation also has its advantages, especially if they:
- Are concerned that a network might be over-restrictive
- Have the ability, time and inclination to undertake the additional controlled functions (Discharged correctly, the CF10’s duties are particularly onerous and not to be taken lightly)
- Can meet the regulator’s capital adequacy requirements
- Have sufficient infrastructure to complete the tasks which may otherwise be undertaken by a network. For example, fee reconciliation, training & competence, research, financial promotions, case review, complaint handling etc
- Want to have more control over their business and potentially more flexibility; networks are bound to centralise many decisions
It’s important to remember that the Conduct of Business rules are identical, irrespective of your authorisation status. The question therefore has to be how a directly authorised firm mirrors the services offered by a network, without which, it is impossible to run an advisory firm.
That brings me to costs.
Which is cheaper?
There’s no doubt that direct authorisation can be cheaper. Especially if the business is run on a shoe string; obtain authorisation, pay for the cheapest Professional Indemnity Insurance you can find and decide not to buy in any compliance support. I’ve no doubt some businesses trade that way. In fact, I know they do. But it’s dangerous, will impede growth and is potentially very risky for both them and their clients.
In my experience, network costs equate broadly to those of a well-run directly authorised firm (or, at least, they should), with the necessary resource allocated to successfully performing key functions. I therefore don’t believe that the decision between network and direct authorisation should be taken based on cost.
The greater good of the business, and its clients, is of far more relevance.
Back to the original question
Which is best, direct authorisation or network?
The definitive answer is that there isn’t one. In a world that increasingly demands binary, simplistic, answers, that’s bound to disappoint some people. But it’s just not possible to say that network or direct authorisation is always best. It really does depend on the needs of your business in the short, medium, and long-term, then matching these to the solutions available.
Whichever option you choose though:
- Read the contracts carefully
- Understand the options should you wish to leave
- Speak to existing and ex-members (both are great bellwethers for the state of the network)
- Undertake as much financial and regulatory due diligence as possible
Most importantly, whatever you decide to do, make sure that your decision is based solely on the needs of your business, its clients and the available evidence; not rumour, myth and conjecture.