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Chris Gilchrist: What is the real value of independence?

Predictably, some IFAs did not like my last column, in which I said the distinction between restricted and independent advice is not that important.

Historically, of course, it is true that the difference between multi-tied and independent was important but that is no longer the case and after the RDR it really will not matter to most clients.

Both restricted and independent advisers will operate the same customer-agreed fee-charging system. If necessary, the FSA will get a work-round to make this happen within the Mifid framework if it does not, the RDR will be dead in the water.

From a man-on-the-street, common-sense perspective, if my adviser charges me fees and gets no kickbacks from providers, he is independent. The range of products on which he can advise me is a secondary issue. Realistically, most restricted advisers are going to want to have a reasonably competitive range of products covering all mainstream client needs. But if they are focusing on a narrow client base, then it may make sense for them to have a narrow range of products. This will not make them any less independent in terms of how they frame their proposition or how their clients see it.

In my view the FSA needs to be more prescriptive about the way that restricted advisers describe the range of products on which they can advise and possibly even force them to highlight the sectors on which they do not advise. The individual needs clarity not just on the fees but also on the scope of the advice in order to be able to assess it.

But this is a minor quibble compared with the main issue what is the real value of independence?

As several respondents to my previous column pointed out, many IFAs do not at present advise on a product range much wider than multi-tied advisers. After the RDR, IFAs will be obliged to consider all product categories (all products available to individuals) that could match the client’s needs.

Many people have argued that IFAs will be able to evade the spirit of the requirement by saying they research all sorts of products as and when they come across a client who may need one, or giving blanket reasons why they do not consider certain products. I suspect this will not work, for three reasons:

  • How do you stop individual advisers from making recommendations without considering products on which they do not normally advise, for example, unregulated collective investment schemes?
  • How do you do ad-hoc research on niche products in a robust and claim-proof fashion?
  • To state exclusions of products in a claim-proof way may require highlighting exclusions in suitability reports.

The professional indemnity insurers have yet to get to grips with this but it seems certain that IFAs will face a set of potential claims that restricted advisers will not. Building robust IFA advice procedures after the RDR is not a piece of cake.

If IFAs want to climb on to independent hobbyhorses and ride them into the sunset, carry on. I think the focus on products has a yesterday feel to it. The value clients perceive is in the generic advice, not the product selection, so advisers’ propositions should be about advice rather than products.

As we get closer to the RDR, I suspect many more advisers will decide that they can offer an excellent service as restricted advisers and still portray themselves as independent in all the aspects that matter to their clients.

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 16 comments at the moment, we would love to hear your opinion too.

  1. I agree with Chris I am afraid and hence will now stand back and wait for the flak along with him.

  2. Stephen @ Create Wealth Management Ltd 7th November 2011 at 2:48 pm

    “I suspect many more advisers will decide that they can offer an excellent service as restricted advisers and still portray themselves as independent in all the aspects that matter to their clients”.

    Havent SJP been doing this for years!

    “But if they are focusing on a narrow client base, then it may make sense for them to have a narrow range of products. This will not make them any less independent in terms of how they frame their proposition or how their clients see it”.

    Really!!!!????

    You seem to suggest that independent means fee based advice only and has no relevance to product & provider choice. I cannot agree with this.

  3. “The value clients perceive is in the generic advice, not the product selection, so advisers’ propositions should be about advice rather than products.”

    Agree completely. Few will see much benefit in the restrictions required to use the words Independent as perverted by the FSA

    Also If your points are taken to their logical conclusion there may be some who see no further need to be regulated by the FSA at all – simply meeting the need for generic advice – with clients implementing that advice by going direct

  4. I’m with you too! I’ve not yet met a client for whom ‘independent’ didn’t simply meant ‘not tied/multi-tied’

  5. I agree too.Having a robust process in place for investment products i have not and unlikely to suggest seems a waste of time.

  6. Please correct me if I am wrong but I believe Accountants & Solicitors are still supposed to refer only to firms that will retain Independent status (ignoring the inevitable Solicitors – SJP comments) & therefore, whilst the clients may not be too concerned, our professional introducers will be
    Funny old world…..

  7. If I knew how to do a flow chart other than by hand I would show you how we need to turn on it’s head the Restricted argument, otherwise the banks may be the ones training to claim “Independance” under the new rules.
    With MAS claiming to be “Independant ” and to give “Advice”, SJP not clearly stating their status to solciitors even now and so on, I have already changed my job title and dropped the word “advice” as the Advertising Standards Agency, by not upholding the complaint about advice, “free” and their claims of Independance has devalued and made meaningless the term “advice” and RDR will do the same to “Independant”.
    So post January 2013 I will clearly state what my restrictions are and then ask any client to compare that to the restrictions their supposed “Independant” tied to an employer is working too. Solicitors aren’t stupid and I suspect that they will revert to looking at the law of agency and that alone and not a title “Independant”
    If you can’t beat them, change shirts…. (p.s. please don’t phone me SJP, I am not interested I want to work to MY restricitons, not somone elses, which I think may be a better description of Independance than some will come up with)

  8. test – do not post live

  9. Chris is making the same mistake as many other commentators. They think all we do is sell products. Most often we have a table covered with papers from many different sources, old employer pensions, now defunct life companies and investment houses. if we are not independent how can we advise on the client’s existing holdings. That, believe it or not, is far more what we do than just flog products.

  10. I am not sure the term indepedent or restricted is of any value to the consumer.

    Whether you only sell Fords or can sell me any brand – you are trying to sell me a car.

    I want your expertise, knowledge and experience to guide me to a better place.

    I want you to be my fiduciary to help me understand the complexities of the decisions I need to make for a better future e.g. to annuitise, or invest or gift for example. But by being on MY side.

    And to stop me from making the wrong decisions based on my inherent biases – attitude to risk without understanding my risk tolerance, under estimating how long I might live, not understanding state benefits, not appreciating the impact of inflation over 20 years in retirement.

    While you remain a product sales person you will always be seen as insurance sales people. Which, so long as the products are well regulated, is fine….but is not a profession.

  11. As I understand it, the FSA are content that if one claims to know everything about everything – constantly – one is independent.

    Why do I strongly suspect a psychiatrist might come to a very different conclusion?.

  12. Strongly agree with David Norman. Well said – and so simple!

  13. If you are restricted, surely this means that you are restricting yourself to areas that you provide advice on not tying yourself to a specific company. So “I am restricted to providing advice on pensions (exluding DB pension transfers which I pass onto a specialist), investments (excluding UCIS and individual shares), protection, mortgages, group pension schemes; I won’t provide advice on non-uk domiciled funds (unless UCITTS III), Car park schemes based in Dubai or magic beans. By the way, I am not tied to any product provider and will be able to select the best product for you in the areas that I advise on from the whole of the market.

    Isn’t that what restricted could mean post RDR?

  14. It’s time to put a stop to the FSA’s RDR now. Whilst we’ve been wittering on about qualifications the FSA has been happily redefining the OED.

    Let independent mean what the general public understand it to mean. If it’s good enough for the MAS adverts it should be good enough for us.

  15. “I’m a fully qualified financial adviser, offering a wide range of financial planning advice. I only deal with providers that I’ve assessed as financially stable, offering competitive products, a track record of delivering, and a strong customer focus. I’m not actually prevented from dealing with any provider, but I have a panel of those I’d prefer to deal with. If you have a need for a product that isn’t available from one of these providers then I can still source it for you.

    I can give you advice on your existing investments/policies/products. I’m not biased by commission, because product providers are not allowed to offer commission anymore, and I’m not allowed to accept it. I’m not contractually obliged to place business with a particular firm or firms.

    Despite the FSA requiring me to describe myself as offering “restricted advice”, within the limitations I’ve described I’m still required to put your needs first”

    This would appear to be a strong proposition for existing and potential clients…….

  16. The real value is what a client is prepared to pay for.

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