True Potential LLP

IFAOnline.co.uk

Daniel Harrison, senior partner at True Potential, says advisers are moving from national and network propositions to become directly authorised. And he thinks he knows why…

Applications for direct authorisation with the FSA are soaring. Why? In a word: control. Who controls the client? Although this will differ from one company to the next, typically the clients belong to the firm, and not their adviser. This is correct in both the legal sense and also how product providers determine ownership.

The reality is these clients are yours – you are the one with the relationship and you were the one who convinced them of the need to seek sound financial planning. Try telling that, however, to the advisers of Edward Jones who, after being bought by Towry Law, were told to keep their hands off while some were even unfortunate enough to receive legal letters.

More sensible firms will agree to novate clients from the firm into the new DA entity. Bulk novation makes sense for both parties; the IFA has their trail/renewal income instantly switched on and the industry rights are secured, making things such as valuations possible.

It also makes sense for the previous firm as liability for any indemnity commissions passes to the new DA, avoiding any clawbacks. There is a third party here – firms that novate in, but don’t novate out as a cynical attempt to prevent advisers from leaving. Hypocrisy? I’ll leave you to decide that.

Then there is control over ones destiny. Let us look at another failed large firm… more than six months have now passed since Park Row, based on feedback from an external auditor, was closed down by the FSA. And more than six months have passed since any of its 240 IFAs have been allowed to trade properly due to delays with their re-authorisation.

Two points stand out here – how can an external auditing firm create this issue and why should hundred of advisers be made to suffer when many of them have done nothing wrong?

The answer lies with how large firms are now viewed by the regulator. A large firm that applies the same (compliance) standards throughout can multiply an issue by how many advisers (and in turn pieces of advice) are in that firm.

A small firm by its very nature cannot cause the same possible impact to the consumer. This is why it has made perfect sense for the FSA to focus quite heavily on these firms and make sure they are being managed correctly. At ‘best’ this means that advisers have to follow the rule of the lowest common denominator and follow draconian procedures. At worst, the terrible situation that has afflicted Park Row IFAs may prevail.

The answer is to put the adviser in the driving seat by owning the firm and being responsible for their own advice and compliance procedures.

Who is the best person to present to the FSA what has been sold and how the customer has been treated; the compliance manager of a large firm who has never met your clients and has a reputation to uphold (how many compliance managers get another job if they have a bad rapport with the FSA?) or the owner of the small firm who actually met the client, delivered the right advice, is proud of the advice they gave and is confident that his and his firm’s reputation is solid.