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