Many IFAs are still living in a dream world. In this world, they will be top dogs after the RDR just because they stick the word “independent” in their company name. Restricted advisers will be second-class citizens, as will those giving basic advice.
It is time for the dinosaurs to smell the coffee. Independence is not going to mean what they think and most IFAs will probably become restricted advisers if the FSA persists with its current definitions.
The FSA’s determination to stamp out the ability of all fee-charging advisers to share in product revenues directly or indirectly is laudable and the regulator’s latest blast against distributor-influenced funds is also correct – if you are a fee-charging adviser, you should not be recommending such funds because you cannot be an independent adviser and an investment manager. After the RDR, these roles will become distinct and advice and investment management will be paid for separately.
Firms may choose to unbundle the elements in the advice-investment management process in different ways but investment management under a discretionary mandate will not be a role for IFAs or restricted advisers.
For the next few years at least, the advisory mandate will form part of many advisers’ core ongoing advice proposition.
But some will unbundle that and outsource fund selection and even portfolio construction. Eventually, that may become the norm, as it has in the US.
Unbundling is an inevitable consequence of fee-charging. Clients will see what they are paying and will question how much they are paying for different elements of the service. The core service of feecharging advisers is going to be financial planning and asset allocation. That does not exclude the possibility that they collect a fee from the client that includes investment management and then buy that from selected discretionary fund managers.
All the above applies to restricted advisers as well as IFAs. In fact, some of the multi-tied have already got models that IFAs will be adopting. But how many will stay as IFAs? It is clear that IFAs will be able to wriggle around the requirement to do whole of market research – no doubt you will be able to buy much of this research (VCTs and EISs, for example,) off the shelf.
But what they cannot wriggle out of is the regulatory requirement that if the client’s needs include a type of product you do not research, you have to research it or turn the client away. How many IFAs have thought about the potential for future claims because they did not consider a product (possibly a recondite one such as a European Sipp) that would have suited the client better than what they did recommend? That is a liability you avoid by going restricted.
I remain convinced that almost all large-scale advice businesses will offer restricted advice, especially if, as seems likely, the lawyers decide to change their rules to permit them to deal with restricted advisers. The Personal Finance Society also is becoming noticeably more accepting of restricted advice. IFAs may think that independence will give them a status restricted advisers do not have but I do not believe that. It will be the service proposition and how well it is delivered that determines success after the RDR. Just as it did before.
Chris Gilchrist is the joint author of The Process of Financial Planning and editor of The IRS Report