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Kim North: Hybrid advice the best of both worlds

Kim North

All advisory firms should have made up their minds whether to stay independent or restricted as we move through to the end of this difficult economic year. The latest and believed to be final FSA guidance on what it means to be an independent or restricted financial adviser should help those still to decide.

The regulator believes it is not too difficult to be an IFA and has stated in its latest factsheet that there is a new definition for independent advice. This reads that the advice must be unbiased and unrestricted and based on a comprehensive and fair analysis of the relevant market. No big changes in being an IFA then – thankfully.

The existing requirement of being free from any restrictions that could affect an adviser’s ability to recommend whatever is best for the customer and the allowed use of panels continues, which I am pleased about.

A new term used in the rules is “retail investment product”, which includes packaged products, structured investment products, all investment trusts, unregulated collective investment schemes and any other investment that offers exposure to underlying assets but in a packaged form which modifies that exposure compared with a direct holding in the financial asset.

At last, we have a regulator’s investment product definition that makes sense. All investment trusts will be in the regulatory scope and Ucis are being brought in as regulated which will include traded endowment and life settlement funds. The FSA has been vocal that it does not like these investments but from next year, advisers will need to consider Ucis which may prove to be relevant to a client’s needs. Which advisers will be brave enough to recommend Ucis after the RDR with all this regulatory activity?

I have tried to explain to consumers the difference between an IFA using a narrow range of panels and a restricted financial adviser. As expected, it is difficult to explain and understand. Add to this the increased distribution choices and I think there is little hope of consumers clearly understanding what type of financial advice or guidance they are getting, which helps nobody.

I have always believed that it is best to offer the client a restricted proposition alongside an independent offering. Providing advice on small pension pots at retirement, protection and other types of specific financial product advice does not require whole of market advice to get the best results. With there being over 30,000 products available across the whole of the market, professional indemnity insurance will be cheaper for those not offering whole of market advice and trainee advisers will be at less risk of misselling by offering restricted advice.

Advisory firms may need to change their name if one or more advisers within the firm are restricted to remove any reference to independent advisers. This may result in better branding by firms and refreshed marketing materials, which will need to change anyway because of the regulator’s change from the FSA to the Financial Conduct Authority.

Moving to a restricted advice model is not all positive as restricted status will force the firm to end any professional referral arrangements under current rules. But does anyone seriously believe that quality advisers such as those with SJP have never been introduced to a person needing financial advice by a friendly accountant or solicitor? I think not.

Kim North is director of guidetoadvice.co.uk

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. I’m not sure I agree with the final paragraph. My understanding of the rules on referrals from solicitors or accountants are… “Any referral must be given to a firm with the ability to provide whole of market advice”

    Surely a firm running a hybrid model is capable of doing this?

  2. The article in general is a very strong one.

    However Ian (above) is absolutely correct and the last para is wrong: – “Hybrid” describes (“restricted plus whole of market capability”) so Hybrid is fine for the very latest SRA (legal) and ICAEW (Accountancy) guidance – I re-checked this today (22 June).

  3. I think the FSA final guidance was the last piece i the jigsaw and remaining Independant, need not be too onerous.
    What I do think people are confusing is the difference between restrictions and restricted.
    a client may impose restrictions on the cost of independant research they can or will pay for, or on the use (or not) of ethical/SRI and so on. An adviser may therefore quote one price for passive funds and an additional price for extra research to use active funds. It could be clients then choose only to use passive due to teh extra research required until a certain fund size is reached. The adviser in this definition is Independant as it is the client stating the restrictions they wish to make.
    If the adviser says “I only use passive funds” or “I only use XYZ wrap”, then the adviser is placing the restriction.
    I currently use several wraps ad platforms, but have reently taken on a client who was already on a platform I have never used. I have kept the client on that same platform, but informed them I may need to chareg an extra admin fee for the training needed to become conversent with this platform’s oepration. I haven’t, but I reserve the right to, or I may reccomend changing wrap (although unlikely as there are life bond based sections to the wrap I have inherited which make it innappropiate I think and there is nothing wrong with this wrap anyway.

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