The choice for advisers between independent and restricted advice models is one area that has been driving lots of interest.
One of the key objectives of the RDR is to improve the clarity with which firms describe their services to customers. This has resulted in the FSA’s new requirement regarding the basis on which advice is delivered. Advice can be independent or restricted or one of the more streamlined classifications of simplified or basic advice.
According to the FSA, the key requirement for being allowed to carry the badge of independence is that the advice should be whole of market.
This can have many connotations but the FSA has been quite specific that this should mean that advisers consider the whole of the relevant market, in addition to providing unbiased and unrestricted advice.
The restricted advice market, however, is often confused, mainly with the old multi-tie regime. In fact, advice could be classified as restricted not only if a limited range of products are advised on or if it is tied to a product provider but also if it is limited in terms of the scope of the advice that the firm will provide.
Naturally, there has been a lot of speculation about which camp advisers will end up pitching their tents in.
Will advisers go independent, restricted or perhaps even decide to have a foot in both camps?
It is important to remember that even if an adviser firm adopts the restricted model, it will still be expected to meet all the other requirements of the RDR such as the new adviser -charging rules and the need to meet the same higher professional standards as independent advisers.
Understandably, the FSA itself would be concerned if its new rules had the effect of radically reducing the supply of independent advice.
With the new category of restricted advice, most of the debate has been about how much of the existing market will end up here, with estimates ranging from as low as 15 per cent to some estimates that suggest more than half may end up restricted. I think this debate could be largely irrelevant and missing the point.
The biggest impact of the RDR will actually be a fundamental reshaping of the dynamics of the relationship between investors and advisers.
Although it is clear that many quality adviser firms have already moved onto ongoing service and fee models, the RDR will further increase this trend.
Adviser-charging and the collection of fees will enforce a different commercial dynamic on the relationship. If a customer is not happy with the service, they will simply stop paying fees. Investors will start comparing rate cards for similar services. Most important, they will start to look at the advice proposition they are being offered and ask whether it is worth it.
Advice is an ongoing service and the RDR will help to focus attention on this fact. The most significant effect of the RDR will therefore be a reinforcement of the need among advisers to develop differentiated customer value propositions. This should be good for investors and provide challenges and opportunities for advisers.
Advisers will have to think very carefully about how they want to position themselves. They will need to think and possibly reassess which customers they want to target, what their needs are, how their firm will meet these needs, and how they will be different from others.
The expression, you can’t be everything to everyone, is likely to ring true, with a greater onus on targeting a particular segment in the advice value chain.
The choice between independent and restricted advice will be an important consideration but the decision will not be a binary one by any means. It is quite possible that some firms may decide to adopt multiple advice models ranging not only between independent and restricted but going right through the service spectrum to include execution-only services at the most simplest level.
Such multi-advice models could be used to deliver a range of advice services to different segments of investors and at a range of different prices.
When making the decision on where to operate in the advice market, advisers will have to consider three key factors – the make-up of the existing customer base, how these customers can be serviced profitably and the type of customers the firm wants to attract.
Having segmented the customer base, advisers should then consider what the key service propositions are for each of these, how these should be delivered and then, ultimately, what kind of pricing will work.
There will be segments of the market that attach greater value to independent whole of market advice. The offer of more restricted advice may have some appeal to this same segment, but with different pricing dynamics, or this service level could appeal to other segments of the market altogether.
In summary, the independent versus restricted advice debate is relatively overstated in some respects.
Its relevance needs to be considered in the wider context of the RDR forcing advisers to reassess their customer value propositions and the parts of the market that they want to operate in.
I predict that a key outcome of the RDR will be greater segmentation within the industry, with a greater focus on delivering differentiated services to different types of customers.
We will probably also start to see the evolution of bankstyle segmentation models that seek to navigate from basic low-value customer to wealthier high-networth clients.