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It all ends in tiers

Tick a box – single-company financial adviser, multi-company financial adviser, independent financial adviser or independent financial consultant adviser.

According to the proposed status disclosure document attached to CP121, in which the FSA proposes the scrapping of polarisation, this will be an adviser&#39s first act on meeting a new client.

Black and white will be replaced by many shades of grey. Many IFAs, with the notable support of the Consumers&#39 Association and some of the national press, have said the proposals will lead to massive consumer confusion.

All but the last category – the IFC – are self-explanatory. To qualify as an IFA under the regulator&#39s new proposals, an adviser will have to adhere to a “defined-payment system to remove the potential for commission bias”.

To tick the IFC box, the adviser (or rather consultant) has to be fee-only. In addition to these four levels of advice, the FSA is also proposing a new kind of generic adviser, who would be able to give simplified general advice. It also refers to the possibility of IFAs giving generic advice for free through Citizens&#39 Advice Bureaux.

According to FSA chairman Howard Davies, the plans to scrap polarisation are a “significant liberalisation package to enhance consu-mer choice by breaking the shackles that polarisation puts on competition and innovation. New enhanced disclosures should be introduced to ensure that consumers are clear about the different types of adviser available to them.”

The term IFA has been tripping off people&#39s tongues since the late 80s, but now it seems everyone will have to get used to a new terminology. In the nervous anticipation leading up to last week&#39s publication of CP 121, most people referred to multi-ties. Perhaps in an effort to move away from some of the negative connotations that have built up, the FSA now prefers that these should be termed distributor firms.

Many in the industry are sitting on their hands, not yet willing to admit they are considering the distributor or multi-tie options. However, some have already declared their intentions – after all, there are predictions of a scramble for distribution.

Writing in Money Marketing this week, Axa Sun Life chief executive Andy Haste says IFAs should welcome the proposals, and suggests that IFAs could choose a hybrid status (part-independent, part-distributor) which could form a large part of the market.

Cap Gemini Ernst & Young vice-president Shaun Crawford, whose research on behalf of the regulator exonerated IFAs&#39 use of panels, believes the way that stratified advice will work is very clear: “It all depends on how much people are willing and able to pay.”

High-net-worth individuals with substantial portfolios will want to pay fees to get the best advice, he says. These will be the clients of the IFC. Then there will be people who will want to pay either by fee or some defined commission structure to have independent advice, for whom the traditional IFA would be right. Nevertheless, Crawford predicts that the independents will see their share of the market shrink from its current 60 per cent to 20 per cent.

Multi-ties will take the mass market. He adds that for those who cannot afford to pay for any advice at all there will be option of buying without any advice.

What Crawford does not say is that the FSA proposals for tiered advice approximate the UK&#39s class system.

This would appear to be endorsed by the FSA itself, which refers to independent advice as the Rolls Royce model. And as Crawford says: “I suppose this means Minis for the lower end of the spectrum.” Some could argue, however, that those at the lower end of the market could end up with no advice at all.

Many RIs, claims Crawford, will simply decide to multi-tie and will do little more than change the sign over the shop. Some of the networks will be well placed to multi-tie, such as Bankhall/ Skandia, and others, such as Misys, he suggests, will be able to use many different layers of advice.

Like many other commentators though, he thinks the main victors under the new regime will be the banks. He says: “It has been given to them on a platter.”

One of the questions being raised is how strict these different categories of advice will be. Issues such as whether an RI will be able to change hats, and whether a firm will be able to have different tiers of advice within its walls will no doubt be clarified during and after the consultation period.

Another issue that will have to be clarified is that of IFAs who choose to become multi-ties but continue to service clients from their independent days – will they be able to advise on existing policies with providers outside of their new ties?

The tiered-advice model seems to take little account of the way in which consumers&#39 needs change during the course of their life as they accumulate wealth.

Crawford predicts that the banks will have within their proposition the ability to refer people on to independent advice once the clients are in a position to require it.

At the other end, the FSA proposes firms could have generic advisers who would offer a simple financial health check and operate with simplified fact-find and key features documents.

Aifa director of policy Fay Goddard says she is not opposed to the idea in principal, as long as it takes place with in an IFA firm, and the generic adviser is trained to recognise the flags that require them to refer the client on to a qualified adviser for full advice.

The main plank of Aifa&#39s lobbying of the FSA and Government for the preservation of polarisation has been that to get rid of it would result in customer confusion. The FSA believes a new status document will solve the problem.

Aifa council member and Warwick Butchart Associates managing director Len Warwick says that it has taken over a decade since the introduction of polarisation for consumers finally to understand the benefits of the independent advice.

He is deeply concerned that the new proposals will dangerously muddy the water. “The problem now is people will see someone who looks like an IFA and acts like an IFA because he makes choices but is not an IFA.”

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