The time is right to do away with the tied and independent labels which confuse the public and bring in the specialists
The polarisation debate is hardly heated – in fact, it is hardly a debate at all. The consensus is that the so-called white labelling of products has its appeal and that multi-tied sounds like a bad idea so it follows that the IFA is likely to survive in its current form and so, therefore, will the tied agent.
That will probably turn out to be disappointing for everyone when this latest chapter of the financial services story is re-read and analysed.
One particular section of this debate has gone unheard. That is the small band of professionals who ask the question that dares not be considered: Do we need polarisation at all?
It actually does not matter whether you are talking about the pension misselling era, the so-called endowment scandal or even the Isa debacle, the facts are plain – most of the problems were evenly spread across the polarisation spectrum. This is the whole point. It is a general problem of levels of expertise rather than anything else.
For example, if you are a close follower of industry developments or maybe even a compliance officer, CP28 will be a familiar reference to you. It is, in simple terms, an opportunity for the regulators to redefine how fund recommendations are made to clients by advisers.
Why is it necessary? Well, recent research by Scottish Value Management sugg-ests that fund selection is generally based on five criteria. These include the organisation's brand, the relationship the adviser has with the provider, the people involved and their investment management process.
Yet 50 per cent of the decision comes down wholly to past performance. This is concerning but fits the current average profile of best advice computer systems which churn out statistics based on exactly that.
Now the FSA hints that past performance may no longer be held up as the Holy Grail of fund selection justification. About time, too.
Here is a case in point. At the tail end of 1997 and into early 1998, most investors would be embracing the Warren Buffett school of value management, headed back then by some sterling performance from Perpetual fund management.
Based on past performance, it would have been very hard to choose any other mainstream fund manager at that time. What happened? Value investing died a death and the boom came from TMT and growth stocks generally.
All in all, good performance is never guaranteed to continue although some evidence suggests that bad performance does repeat more consistently. So, surely the point remains whether these changes could have been foreseen? Well, by the trained investment analyst perhaps but that is not the point. The point is that a huge number of IFAs bought the performance story and poured client money into these funds based on the historical picture and the clients subsequently lost out.
The conclusion is clear and obvious – unless you present an argued economic case for the fund choices (outside of the consensus on past performance), you can happily recommend any top-quartile fund without fear of reprisal without even analysing the reasons for that fund's success – at least at the moment as CP28 will change all that.
The polarisation argument falls down badly when in theory an IFA is expected to know every detail of every product from every company in the market and be bang up to date as well.
Tied agents exploit this, understandably, when selling against them. Then there is the consumer champion argument that IFAs tend to go to the company that pays them the most commission. Again, this is hard to totally refute under the current regulation which at least makes it possible for this to happen.
My call is for a radical new way of categorising all advisers. It is time to do away with the expression of tied or independent. Very few members of the public understand them fully anyway.
The introduction of specialists would herald a truly new era for the consumer. Standards could be rigorously tested with closer re-inspection and real CPD it could be based on a minimum of AFPC level and preferably higher. The bog-standard products could remain for basic-level advisers and the direct providers.
This is a relationship business and people will buy from people they like – status is irrelevant to the consumer so it is up to the regulator to protect them from themselves.