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Chris Gilchrist: Advisers must get real on independence

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

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. “Especially if, as seems likely, the lawyers decide to change their rules to permit them to deal with restricted advisers.”

    This is a typical siren call of those tempting advisers over to the restricted world. But none of the solicitors I talk to think that this is on the cards. The new SRA Code of Conduct w.e.f. 6th Ocotber is also quite clear on the subject.

    Outcome (6.3) says: “If a client is likely to need advice on investments, such as life insurance with an investment element or pension policies, you refer them only to an independent intermediary.”

    If Mr Gilchrist has evidence to the contrary, perhaps he’d be good enough to share it?

  2. Exasperated I am, what is the point of it all?

  3. I think Chris may be right in his comment that a change in who Solicitors can introduce business to may occur. A change to the requirement that introductions can only be made to an ‘independent’ is unlikely but what is the definition of an ‘independent’? Currently the Law Societies use the FSA definition – but they do not seem to be required to do so. With the number of JVs in existence and the need to have ‘wealth managers’ to run funds for them I for one would not be surprised to see a new definition of ‘independent’ being used for this purpose – if it’s good enough for AIFA!

  4. Some of us have obviously spent the last 20 years in this “dream world”, not the first time this phrase has been used in the context of the future of Independence.
    Being Independent is not about being “top dog” or some kind of financial advisory “one-upmanship”. It is about understanding that consumers / clients trust Independent advisers more, and that Independent advice is philosophically and practically better for consumers / clients.
    It is also about understanding that Restricted advisers will cover a spectrum from “nearly Independent” to “tied”. I’m not clear how many current IFAs contemplating Restricted advice propositions have worked through the implications of that.
    Independent advice is worth fighting for, and advisers who want to continue to provide an Independent advice firms deserve repesentation and support.
    Making scary assertions about the requirements isn’t helpful – and if it turns out that the requirements are unfair or disproportionate then the answer is to look at the requirements, not to water down the value or importance of Independence.
    The professional bodies are about professional qualifications, and professional qualifications are quite different to regulatory standing. Confusing the two helps no-one.
    You say those of us who value Independence are in a “dream world”, but surely that is preferable to the nightmare of a world without Independent financial advice??

  5. A good article, however one point that Chris raised I believe the FSA have issues with now and more so going forward : “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.”

    At a recent FSA meeting they made it clear that they have issues with default fund offerings…therefore all IFAs going to DFM or model portfolios should be careful as I dont think this will have the protection you desire. I thought the interesting point from the FSA on RDR and one I agree with is the fall back to the “generalist IFA”… I know you will argue that specialists are good but what the FSA are trying to say is that an IFA should do the research for a client which should be all encompassing. Interestingly if you have 3 IFAs who specialise in 3 areas but by default cover the full spectrum of advice then your firm post 2013 will be restricted, not an IFA…some interesting times ahead

  6. I am sorry Gill, but I am inclined to agree with Chris. Much as I believe Independance is worth fighting for and I applaud you for doing so, I also believe it is important to be prepared for providing “untied” restricted advice and start positioning these options with clients now to identify which clients this may be an issue for.

  7. I think we need to step back a bit and look at exactly what we mean by Independent. Phil Castle is right to refer to ‘untied restricted’, it is a legitimate model and still puts the client right at the forefront of the planning process. The FSA has caused confusion by identifying a type of advice by reference to the type of product advised on rather than concentrating on the key issues of remuneration and professionalism.
    In practice, thevadvice given by Independents and untied restricted advisers is likely to be the same in the vast majority of cases.

  8. Gill, as I read Chris’ article, he is not at all attacking or downplaying the value or benefit of Independent advice, as defined by the FSA, but rather pointing out that many advisers will not be able or willing to comply with that definition, and by default, will be in some way, restricted, and that those who might be affected need to recognise this and prepare accordingly.

    The reality is also that, in practice, many who currently trade as Independent are actually, for a variety of reasons not, at least in the way the FSA now seeks to define it, and would be viewed by the the FSA as restricted.

    Before the Financial Services Act introduced the ‘Independent’ tag, and we became IFAs, the ‘independent’ was generally known as a Broker, which to my ears would be a better and clearer description than ‘restricted’, if it could be re-introduced.

  9. I wonder how many of todays advisers who think of themselves as Independent are actually restricting their advice to those products which either pay commission or facilitate adviser charging.
    I suspect that there is an awful lot of change to take place before the industry is ready to deal with the debate over the value of independent advice over so called restricted advice.

  10. The RDR meaning of the word “Independent” means nothinless than Jack of all trades and is an insult to true Independence.

    It is not even sufficient for a multi partner firm to have all bases covered. Each and every adviser must effectively claim to be an expert in everything.

    It is, of course, possible that the FSA do not fully understand what they are saying ( won’t be the first time) and that “in practice” Independent advisers will get by but far more likely is that firms with individual restricted advisers will take over the role of current Independents.

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