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D-Day dodgers

With the approach of D-Day – December 1 – the minds of tied and independent advisers should be straying towards the consideration of their regulatory status in the newly depolarised world. Depolarisation offers advisers the options of being whole of market, limited choice or single provider. Currently, of course, there are only two choices -IFA or tied adviser.

It is interesting to note that the choices are defined by reference to the scope and range of financial products on which individuals will give advice. It seems to me that perhaps a new kind of polarisation needs to be considered, namely, the choice between a business model founded on the delivery of advice, incorporating tax and investment advice, and one founded on the completion of transactions.

Inextricably bound to these two business models is the method by which the business is remunerated. In the advice-based model, the adviser will most logically be remunerated by the client directly for what is delivered – the advice.

The important factor here is that the deliverable is the advice. Thus, for an adviser to rely exclusively on there being a financial transaction in order to receive any remuneration for what is delivered seems somehow to compromise the purity of the advice. This is not to say that products will not be incorporated into the advice or that an adviser cannot or should not receive part of his or her remuneration for the advice from a product provider if, as part of the advice, a product or products are to be bought.

More than a few advisers today will quite routinely offer their clients an advice-based service that is founded on a fee but with the proviso that the fee will be reduced by the amount of any commission received from any product providers in respect of any products implemented as part of the plan. A variation on this theme will be that the fee is charged in full but the commission entitlement in respect of any products implemented will be given up by the adviser so as to increase the value of the product to the client by reducing charges.

The key point is that in both models the adviser starts with the remuneration for the deliverable (advice) in the shape of a fee to the client. The commission part is dealt with as a by-product of the advice process and may well operate to reduce the cost of the advice to the client or increase the value of what the client buys.

Of course, to the extent that the client pays by way of commission, VAT will be avoided on that part of the fee that would otherwise have been paid. The adviser will, of course, be taxed on the fee or commission. There may, subject to the satisfaction of strict conditions, be the capability to defer tax on so much of the commission as is not actually earned.

Under the proposed depolarisation rules, anybody offering financial advice that could incorporate advice on the implementation of a product must be regulated as one of the categories specified in the relevant consultative papers, namely, one who can give advice on products across the whole of the market, one who can give advice on products from a limited range of providers and one who can give advice on products from a single provider.

Some have considered that it would seem to be feasible for a financial adviser to offer a service that is founded entirely on the delivery of advice for a fee and for that person to not offer, as part of the service, any selection or implementation of products that requires the adviser to be regulated. Advice on generic tax and financial planning solutions that may be appropriate for a particular client might be given without recommending or implementing a particular product.

The argument is that the adviser would then be offering financial advice on the structure of the financial plan including, say, its tax implications, possibly with generic product indications but, importantly, with no specific product recommendation and certainly not any actual implementation of the products. This does not necessarily mean the adviser would escape the need to be regulated but he might. Each case would need to be treated very much on its own facts and would depend on exactly what was done.

In this scenario there would then be a very clear division of the roles between creating the overall financial solution and selecting and implementing any specific products intrinsic to completion of the plan. For this purpose, it may be appropriate for the non-transacting adviser to have a business relationship with a transaction-based business whose role is to make selections in accordance with the generic structure of the plan and implement the purchase of those products. The revenue flow will be from the client to the adviser for the advice and from the product provider to the transactor in the shape of commission.

It is here that this model may become financially unattractive for the investor who would be paying a fee for the advice and indirectly bearing the cost of commission. There would need to be some liaison between the adviser and transactor to ensure the client was not disadvantaged financially by this split of roles. While a single business giving advice and implementing any product sales can offset commission against fees and still achieve an economic return, this may not be possible when two independent businesses are involved.

If no advice is given to accompany the sale of a product, then most agree that it is likely that, certainly in the long term, the commission earned by the transactor will be at or close to the lower scale for stakeholder products. In the long run, it will be hard to justify a higher payment to the transactor if no advice is being given for which the client has not paid directly.

To make this business model work for the transaction-based business, if the remuneration in respect of each transaction is lower (to reflect the fact that no advice is given by the person receiving the commission), then to secure a reasonable level of profit the transactor will need to have a low cost base and/or a relatively high volume of transactions or both.


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