The debate surrounding employed and self-employed Financial Planners is currently a hot topic. Whilst there is a lot of talk about the pros and cons of self-employed advisers in the market, this tends to be focused on the IFA and space and specific sizes and types of business. The same pros and cons do not apply to all cases, and to try to understand this more, it is important to examine the broader 'advice' market as a whole.
It's important to understand that the way Product providers and IFA business owners look at Financial advisers today is entirely different. Product providers see them as a means of distribution so they are happy to see them as one route to market. However, over the years, we have seen all sorts of distribution channels, newspaper adverts, for instance, and now digital sales through aggregators are valid alternatives in their eyes.
Following the introduction of polarisation, which gave IFAs a distinct advantage over direct sales and tied agent models, providers shifted their focus onto selling their products via IFAs. A lot of effort was focused on winning IFA support as it was seen as cheaper and far less risky than having to take responsibility and fund a large direct sales force of their own. As a result, most of the Direct sales forces closed down over the period.
Over 30 years from the introduction of the Financial Services Act 1986 we saw a 90% drop off in the number of Financial Advisers, from around 300,000 to 35,000, but the size of the companies and the amount of wealth they managed multiplied.
RDR changed everything. And when RDR was introduced, the need for higher qualifications and the end of commission on investment products meant a further 25% drop in the number of Financial Advisers within three months and traditional bancassurance was almost wiped out.
Not only was there a reduction in the number of advisers, but post-RDR, many no longer looked to providers for remuneration. The client became the paymaster, and the provider lost control of the client relationship.
This created a real problem for the product providers. Suddenly, IFAs started making their own choices about whom they would choose, and a bit like the large supermarkets took control of food retail, the distributors found themselves in charge of the value chain. They could choose whom they wanted to use; for many, it was no longer the traditional providers. They could also select Fintechs, smaller platforms and niche asset managers. The adviser was genuinely free to do what was best for their client. This squeezed the margins of the Providers.
Well, this didn't happen overnight and has been a gradual process, but providers have woken up and realised two critical things.
Firstly they need to be able to control and influence distribution far better than they can at present and secondly they need to do something to protect their back book.
They controlled distribution through their own sales force which mainly sold their products, which gave them a steady flow of new business. Sales were not dependent on the vagaries of their fund performance and the market like other companies.
Client retention was also high.
Adviser remuneration could still be taken from the product, but their remuneration structure prevented clients from being poached by other advisers.
Larger firms appear happy with the Self-employed model they have. It is a very cost-effective method of product distribution. However, the more prominent players make their money on the ongoing fees they receive from the FUM and are therefore happy to give up profit on the distribution side of the business.
That is also how the market values them. So every year, product providers put out an impressive set of figures that serve their shareholders very well but dig below the surface, and you will see the distribution side of the business is loss-making.
Big companies aren't too worried about adviser fees. They make most of their money from other parts of the value chain, such as platform, product, and asset management fees. They see Financial Advisers as a means of distributing their products which can suggest the more, the merrier. In addition, the fact they are self-employed helps reduce the liabilities on the balance sheet.
As a general rule, restrictive covenants are much tighter these days, so the days of employed financial advisers walking away and taking their clients with them without repercussion are long gone.
Who retains the clients retains the actual value, whether an IFA using employed Financial Advisers or a Product Provider using a self-employed sales force.
So, in summary, the large product providers are happy with the self-employed model and how they have it set up as it is a cost-effective method of distribution that they ultimately control. However, it also poses some challenges because after a few years of working in this type of environment, many advisers start to look at the benefits of becoming independent to offer a broader choice to their clients. And the self-employed v employed argument is very different on that side of the fence.
We speak with many IFA firms, and we would say that the vast majority have all employed or have a tiny percentage of self-employed advisers as part of their overall adviser numbers, possibly as a legacy issue.
Depending on your business model, there is nothing wrong with having a self-employed adviser base. The common pros and cons can fall into the following areas:
It's not an exact science, and for every example I give, I am sure you could provide an opposite agreement. However, it comes down to what type of business you are trying to build and the level of control you need. For example, if the company's goal is to create a business that works in a certain way, it has a specific brand where everyone charges the same, follows the same methods of providing advice, where central services are provided and cost out by the business, then employed advisers would feel the correct way to go. In many cases, advisers are 'given' clients to look after as the company grows, and the client's relationship is with the business as a whole rather than just the adviser.
If, on the other hand, a business is looking to work more as a collective of advisers or a small network approach, self-employed advisers could be the route. The company would provide the framework they have to work to, but the adviser can choose how the advice is provided within the given parameters. For that, they pay you a percentage of their turnover.
Financial Planners would also be responsible for their administration costs or contributing towards the central administration costs, IT, business costs etc., for, in effect, running their own business.
There are currently businesses set up like this where individuals have known each other, and the adviser still wants a reasonable degree of autonomy and doesn't want to go D/A (Direct Authorised) but also does not want to be part of a large network and likes working with the business owner. The business owner sees this as a way of increasing revenue which contributes to covering its existing costs for no significant increase in fixed costs.
This is less common with businesses being set up today where they are more established businesses with existing business models, and often it's too difficult to change it fundamentally.
At some stage, a business owner will want to realise the capital value they have built up in their business. The late Simon Chamberlain once said in a presentation that there were two types of models.
1. If you build a lifestyle model to drive maximum income do not expect it to have much of a value
2. If you build a model to have significant embedded value do not expect to have the same levels of income.
In today's very active M&A market, self-employed advisers are an interesting issue. Earlier, we touched upon the larger product providers having self-employed advisers. Still, if you are a smaller business with three self-employed advisers, you will not receive the same treatment from a potential acquirer. It could not be more different.
Where there are self-employed advisers in place, acquirers will want to know how many, i.e. is it a small percentage of your advisers or not. If it is just one or a small percentage, then acquirers will want to understand the type of contract for services in place and in-depth detail around client ownership. After this, they can work through what needs to be done to secure the adviser/client's post-deal.
If there is a significant number of self-employed advisers, then most acquirers will walk away as the risk is too high for them around client attrition as they have been bitten in the past.
An IFA Business has two directors and four self-employed advisers (mini network approach) with about £150m AUM. This sounds like a good business, but only £40m AUM sits with the directors. The rest sits with the self-employed advisers whose contract states they own the clients. So the business value is minimal compared to a similar-sized business where all the Financial advisers are employed, and the company legally owns all the clients.
This is difficult as it very much depends on your business model. In the example given, if the Self-employed Advisers were told they had to become employed, they would walk and go to another business. Of course, this would have a negative impact on the company. These advisers would probably take the view that it was their business anyway. What you could look to do is put in place some form of a buy-out with the advisers that would allow them to bring the clients and revenue stream in-house over time.
Where you have one or two Self-employed advisers and the service agreement is in your favour, look at locking them in as part of any deal or if this can be done ahead of any deal, it would be better to do it in advance. This would allow you to recruit employed advisers to look after the clients, bringing the value in-house and adding extra value as advisers are a prized commodity.
Regarding self-employed advisers, there is also the elephant in the room, the tax man. IR35 is here to stay and forms part of every conversation with firms around potential risk and where this sits. It's a complex area.
IR35 is a potential risk, but to date, there is no evidence of any of the prominent providers falling foul of that, and with their resources, why would they?
We don't see it coming into conversations at the moment. However, the law changed in April 2021. So who takes responsibility for judging whether the individual is self-employed.
As an IFA, there are two regulatory bodies you don't want to fall foul of. One is the FCA, and the other is HMRC. There is no evidence of larger providers with self-employed advisers falling foul of IR35, but with their resources, they are adequately protected. However, as a smaller business, it is prudent to look further into the implications of IR35.
If a business is in any doubt about IR35 there are some great fact sheets on the HMRC website, in particular, Employment Status Factsheets ES/FS1 and ES/FS2, which can be accessed via this link:
These factsheets give some instrumental guidance around the behaviours of employed and self-employed individuals, which will help a business understand the employment status of their advisers.
Alternatively, for further clarification, it is wise to seek the services of a Tax Adviser.
As demonstrated, there are two directions of travel,
1 Providers are happy with the self-employed model. They make their money on products, not distribution, so they are not driven by adviser fees and consider the value chain more important.
2. For IFAs who are building up value and control, the employed adviser model is the best direction of travel. Because value is seen as a multiple of profit and adviser fees are essential.
At the end of the day, it's horses for courses; it depends on the business model.