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Hide and seek: Investigating conflicts of interest in advice

Advisers are being challenged on whether they are being open enough on disclosing conflicts of interest which may be skewing their recommendations.

Last month, Money Marketing revealed how distribution deals between advice firms, platforms and discretionary fund managers are blurring what are supposed to be clear lines between the cost of advice, platforms and investment management.

Since then, firms have come forward with a number of examples where bundled charges are penalising particular clients, while others have raised concerns that ownership structures may be biasing advice further.

As the FCA continues its focus on suitability, regulatory experts argue advisers that have financial stakes in the services they are offering face an uphill struggle in demonstrating why their advice is appropriate. Some have warned that unless disclosure improves, a cloud will continue to hang over the advice profession.

The Paradigm proposition

As we reported in April, Paradigm has a white-labelled deal with Nucleus which costs a total of 50 basis points. This was explained as covering the cost of the platform and the DFM service Tatton Investment Management. Outside of the Paradigm arrangement Nucleus clients pay 35 bps.

But Money Marketing has seen one recent client quote from a Paradigm adviser which states the Nucleus fee is 50bps, despite the client not using the Tatton service. It is claimed the adviser has used other DFMs through Nucleus but the charge has remained at 50bps. This would suggest one client could use the Nucleus platform for 35 bps, but another client using a Paradigm adviser would be charged 50bps for a similar service.

Paradigm senior partner Paul Hogarth says: “We have two platforms with Nucleus: version one is 50bps and version two is 35bps. Advisers have a choice of which platform to use. On the 50bps platform, the vast majority of the assets are in Tatton but there is a small percentage of assets that are in our old model portfolio service with Morningstar OBSR. That could be what is being referred to.”

Separately, Money Marketing has seen a historic Paradigm adviser presentation which sets out that IFAs and restricted advisers have been offered equity stakes in Tatton on a first come, first serve basis. Tatton has amassed almost £4bn in assets under management in the four years since the service launched.

Hogarth says: “We do have advisers that our shareholders. We have around 240 firms that use Tatton, and half of those are equity holders. It was very much a collaborative partnership with the firms when we got together to create Tatton. Those firms that have equity would disclose that fact in their terms of business, and they manage the conflict based on the suitability of the advice.

“The real driver for the success of Tatton isn’t the fact that some of these have got equity, it’s the price. We have become a disturber by coming forward with this 15bps charge, including VAT, half the price of other DFMs on platforms.”

He adds: “I am more than happy with the level of disclosure. All of our advisers are sensible, professional firms who will disclose and will manage the conflict of interest.”

Dealing with conflict

Potential conflicts of interest in advice extend beyond DFM arrangements. Other examples could include advisers owning a stake in the platform they are recommending, advice firms taking basis points from the platform charge, advisers being effectively tied to using particular services or cheaper software where a particular platform is used.

Law firm 4 Pump Court financial services barrister Peter Hamilton says the key to managing conflicts of interest appropriately comes down to disclosure and testing suitability.

He says: “The ordinary law says what the FCA rules say, namely that you must avoid a conflict of interest and otherwise you must manage it properly. Managing it properly involves full and frank disclosure of what the situation is. The client has to know exactly what the adviser or platform provider is getting out of it.

“The adviser needs to be able to say, notwithstanding the fact they are effectively getting commission, that this is a suitable product or service.

“Let’s say an adviser is offering service A, and it may be as good as services B, C and D. But does the conflict of interest mean it is less suitable? If the charges are all the same it may be alright. But there needs to be proper due diligence on suitability because the FCA and FOS will look quite hard at any arrangement that does involve conflict of interest to make sure it is as least as suitable as the alternative.”

The Ideas Lab director Robert Reid agrees, saying while there is nothing wrong with an adviser using the services they have invested, it is crucial advisers are upfront about potential conflicts.

He says: “Advisers have to ask themselves, if a deal is so good, why would you hide it? The biggest risk is another adviser takes over the client, looks at the arrangement and then questions it with the client.

“You’ve got to look at the flow. An adviser may show the client a diagram and explain they get a bit extra for using a particular service, but the client is getting a good deal because it reduces their charges elsewhere. While that still needs to be explained, if there’s that kind of quid pro quo I don’t think there’s a problem. But if there are secret commissions flying around you have a definite problem on your hands.”

“Better than best advice”

Previous guidance from the FCA on conflicts of interest has focused on arrangements between providers and advisers, inducements and corporate hospitality. The conflicts of interest issue was mentioned in passing in the FCA’s business plan for 2017/18, though this was in the context of the fund management sector. However, the regulator is said to be examining the issue of conflicts of interest in advice as part of further work.

Law firm Eversheds Sutherland regulatory managing director Simon Collins says proving suitability where there are conflicts of interest is a challenge, particularly where advisers own stakes in the recommended services.

He says: “There isn’t anything more specific set out in the FCA rules about managing conflicts of interest beyond disclosure. The difficulty is how a firm deals with the genuine bespoking of advice to the client, when the default might be a preferred DFM or another kind of connected service. The challenge is how can advisers demonstrate they have undertaken the proper investment research necessary to justify the selection.”

Collins says in the era of “broker funds”, set up by advisers and run by providers, the rule at the time was to recommend your own fund you had to give “better than best advice”. He says in the end broker funds stopped being viable because advisers could prove they were meeting the “better than best advice” test.

He adds: “We also have to think about how this sits under Mifid II, because there the onus is on preventing any conflicts of interest, rather than simply managing them. So Mifid II will focus the mind on this.”

Reid says where advisers think they may have a potential conflict of interest, they should raise it with their compliance team in the first instance.

But he also believes there could be a role for professional bodies to help advisers manage any conflicts more effectively.

He says: “A professional body, potentially through the use of an expert panel, could receive cases on a no names basis and it would get reviewed. This is the kind of thing where ethics meets real life. There is an issue where people don’t understand conflicts of interest, and there needs to be a wider debate.

“It may be worth creating some conflict of interest determination form, for example: do I get additional benefit from taking people down this route? Is that benefit immediate or long-term, perhaps in the form of shares? And if you find yourself saying yes to a lot of the questions, it is worth reconsidering.”

EY senior adviser Malcolm Kerr says where conflicts of interest cannot be removed, they should be managed very carefully.

He says: “Sometimes it not about whether there is a conflict of interest or not, but whether there is a perception of conflict of interest. That can be as important, particularly as far as the regulator or industry observers are concerned.”

Kerr says where advisers own or have a stake in the investment vehicle, they have to be very clear as to why that option was the best thing for the client.

He says: “Where there are grey areas is where, for example, someone is holding themselves out as offering the most suitable investment vehicle, but then is getting a fee that is not being identified in any of the literature. Clearly, that is not full disclosure.”

Kerr adds: “There is clearly a perception among consumers and the media that there are conflicts of interest in advice, which casts a cloud over the whole concept of advisers becoming a profession. That perception needs to be addressed. Some people may see it as a sledgehammer to crack a nut, but then again, nuts can grow into oak trees.”


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There is one comment at the moment, we would love to hear your opinion too.

  1. Duncan Carter 11th May 2017 at 9:53 am

    If you’re holding yourself out as being independent then you put your clients interest first, it really is as simple as that.

    Behind the scenes kick backs of whatever form dent this irrespective of disclosure.

    This is the problem with the current description of ‘vertically integrated firms’ who are actually salesmen, not advisers or planners.

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