But at the same time it can make you feel quite bold – because you know that if you set out to do something you’ve got the backing of a large, experienced and financially well equipped organisation behind you.
Cautiously ambitious – sounds odd, but the 176 years of Legal & General’s history shows that it works.
In a time of turmoil in markets this stability and repute – represented not just by us but also by other long term committed major brands, can stand out as a safe haven for firms and advisers unsure of who to trust to partner their livelihood with.
Recent events witness that some firms can be left “high and dry” if a distribution organisation fails and this creates significant trauma for those affected.
I have written in this column before about the challenges all firms in this market face – regulatory change through RDR and MMR, the flat core market of mortgages and protection and the rise in costs – driven by the FSA and lender’s drive for quality – and none of these are going away.
Obviously the spectre of PI costs, and how the insurers will shift premiums going forward is also now squarely on the radar of many distribution firms.
But financial strain seems to be coming more to the fore. How many networks/”aggregators” have reported any significant profits over the last few years?
Few, if any, seem to make any significant profit due to the, perfectly correct, need to invest in RDR readiness, new systems, training and transitional financing.The relative strength of the mortgage and protection side of a network verses its wealth side will therefore be an important factor in its continued overall financial solidity.
Now for some, profit is a dirty word. But if you think that networks making profits and creating capital reserves is a bad thing – perhaps because you think it means they’re doing so at your expense – think on.
Unless they make some profits, and are able to put away money for the proverbial “rainy day” their advisers might be stuck with a network which suddenly folds – unable to meet its, and their, commitments.
The last couple of years have seen the demise of several, marginally profitable “commission club” type operations, who relied on scale alone to generate income. Fast-growing networks, new and exciting business models are all very well on the way in, but when the music stops, they can become exciting for all the wrong reasons.
The failure of networks or other “aggregator” vehicles failures cause huge disruption in the market. Commissions and procuration fee payments can be frozen, or become embroiled in the long work of an administrator appointed to wind the business up.
All parties involved in a crash will quite understandably look at their contracts and seek to abide by their obligations – unless they do, chaos reigns.
But can a network model ever work and be long term sustainable? Well yes, in my view, if:
• it is broadly diversified in its operating model
• with sustainable income streams from a number of sources
• if it has access to other ways of creating “value” from the customer – such as being linked to a product manufacturer or services that a customer needs associated with the housing/mortgage event,
• and if it demonstrates good cost and regulatory controls whilst still focussing on delivering quality services and business solutions to its partner firms.
It also needs strategic commitment to the sector – a real reason to be there for the longer term.
A network needs to give its members a good night’s sleep, free from the worry about being paid, or being paid a difficult visit by the regulators.
For firms looking at network partners, there is no short cut to doing the homework if they want to find a sound partner who’ll be there for the long term. Around these stormy seas, there are a still a few safe havens with both strategic commitment and financial prosperity. If you are currently caught in the storm, I wish you good luck to find the right one for you.
Duncan Crocker is managing director of Legal & General Network
