As a number of sizeable restricted businesses ditch the label in favour of independence, advisers are questioning whether more firms will make the move back to whole of market.
While many of the largest firms in the market still offer restricted advice, the majority of smaller firms continue to opt for independent status post-RDR.
The definition of ‘whole of market’ advice was extended to include ETFs, private equity and specialist asset classes under RDR, but debate still rages over what model services clients best.
Under Mifid II, individual advisers cannot be both independent and restricted, with some predicting a shift to restricted based on reducing costs and compliance burden.
Yet advisers going down the independent path continue to value the ability to mix and match products and fund offerings to build more personalised portfolios, particularly for complex clients post-pension freedoms.
Money Marketing has spoken to a number of key players in the market, including Sandringham and Ascot Lloyd – both of which have opted to move from restricted to independent status in recent months – to see what factors are pushing firms towards one status or the other.
The view from the top
Although individual advisers no longer have the ability to hold both statuses after Mifid II, firms are still able to offer both restricted and independent services if they wish.
The FCA guidelines say that a firm must disclose its restricted nature if it either has set limits on the type of products it advises on, or when the products compared under its advice are from a limited pool of providers.
The FCA outlines that: “You must tell customers that you provide restricted advice and how it is restricted – by product or by provider. You must do this in writing, and also verbally before you give the customer any advice.”
A Money Marketing poll last July asked whether restricted firms were adequately disclosing their status. Fifty-three per cent of respondents said no, 31 per cent said yes, and 16 per cent were undecided.
When it came to Sandringham’s transition, chief executive Tim Sargisson says clients have been alerted to all changes and feedback taken on board as part of its review process.
Despite clear rules on defining advice provided, the transitional process from restricted to independent may face limited involvement from the regulator.
An FCA spokeswoman says: “There is no assessment done by us when firms change their status. Firms can change their status, but they need to make sure that they are following our rules for the type of advice they are giving.”
For independent status, the FCA says: “Firms will need to demonstrate how they have reviewed the market and selected products in line with the client’s attitude to risk and suitability. We do not expect a firm to review the market for a product which does not meet the client’s needs and objectives. Firms can use panels to help review the market.”
Sargisson describes Sandringham’s move to independent advice as a move to whole of market advice, but a panel remains in place, with additional governance work also provided by research agency Rayner Spencer Mills.
Sargisson says: “We have an investment committee that monitors the selection of funds and constructs model portfolios that sit on our platforms. Fundamentally, nothing within the business changes; we’re not going to allow our advisers to go and start picking investments and funds for our products, so we will still tightly control that process to manage risk.”
Is restricted on the ropes?
Five years on from RDR, data from the Financial Advice Market Review showed that 83 per cent of firms provide independent advice, 15 per cent provide restricted, and two per cent provide a mix.
A Freedom of Information request by Money Marketing columnist Paul Lewis shows the total amount of financial advice firms providing restricted advice dropped from 5,746 last June to 5,270 as at 26 February 2018, a slight dip to 13 per cent of the market.
Of the major firms and networks providing financial advice, the likes of Standard Life Aberdeen’s 1825, Old Mutual’s Intrinsic and True Potential have been vocal about sticking with restricted advice.
Restricted advice offerings vary by level of restriction based on provider, product or panel breadth, which Intrinsic managing director Steve Fryett says ties in well with meeting the complex expectations of regulation.
Adviser View: Lena Patel, Director, ISJ Independent Financial Planning
I aspire to be independent because I was in banking for many years under a restricted proposition and then worked at Intrinsic under a restricted model as well. About 12 months ago I started being able to do independent advice, and now I am quite passionate about it because it just gives clients a broader and more holistic approach. With restricted, there is such limited choice for what clients are wanting. For me, there is a difference with being an independent and there is just more that you can offer to your clients when you are an independent adviser or planner.
He says: “Analysing and monitoring the huge variety and range of products, funds, wrappers and platforms is a time-consuming and costly process and we have found more advisers moving towards a restricted model due to the pressures of increased regulation in recent years. To ease that burden, our experts research and vet products so advisers can focus on the financial planning areas that add significant value to their clients.
“However, there may be occasions when the panel will not satisfy a client’s need and in those instances, we work with advisers and research the whole of market to find the most suitable solution.”
Despite more minimal offerings, initial fees for restricted advice are more expensive than for independent advice. Data from the regulator based on a sample of around 700 files shows restricted advisers charge average initial fees of around 3.57 per cent, against the 2.81 per cent charged by IFAs.
The decision to open up offerings to whole-of-market advice was easy for Sandringham, with Sargisson saying the firm followed a “natural evolution” away from restricted advice.
He says: “We feel what we offer is more independent than some other firms out there as independents. We had a long hard look at our investment process and how it’s evolved and decided we were no longer restricted. When you look at what’s gone onto it and funds we now offer to the market, it makes sense.”
Ascot Lloyd chief executive Nigel Stockton says the overall market strength behind the combined Ascot Lloyd/Bellpenny brand also lent itself well to an independent title.
He says: “Under our wholly independent model, we are very comfortable with providing independent financial advice. The ex-Bellpenny advisers have really welcomed that because many of them were IFAs or practice owners before and, most importantly, the clients like it too.”
Sargisson says the lingering prejudice against restricted firms not being able to offer the most objective advice had cost Sandringham valuable business relationships.
He says: “The restricted tag, post-RDR, is very much associated with vertically integrated businesses that are simply channelling client numbers into a limited number of investment solutions, often just from one provider. We got lumped in with Intrinsic and Old Mutual when, really, that’s nothing like our business.”
Few advisers left Ascot Lloyd throughout the merger period, which Stockton says shows the decision to be independent was the right call.
He says: “Morale in the company is good, the advisers are very quick with feedback and are boisterous which is great because you can change things. The business is in the best shape it has ever been in.”
Winning hearts and minds
Sandringham’s focus is on building its network from 160 to 250 advisers, but says it has seen stunted interest because of its restricted tag.
Sargisson says: “We are trying to recruit aspirational advisers, but the hurdle has always been that we are restricted.
“People get really excited about the restricted-independent advice polarisation and it goes way back to when we had the first real regulation in the industry, and yet we are still suffering from that perception where our offerings were still being seen as inferior for both the advisers and our clients.”
Sandringham currently provides access to 13 distinct fund styles across 61 portfolios and funds from its nine managers. Under both its restricted model and its new independent status, advisers do not hold full control over their options.
Sargisson says: “Our plan at the beginning of 2012 was to limit the amount of investment options our advisers had access to as a way of managing risk.
“A lot of misselling has gone on, driven by poor investment choices from advisers which then haven’t delivered for clients, so when Sandringham was set up, it was about getting advisers to join us who understood that we would make the investment choices on their behalf and select the appropriate investments as part of our restricted model.”
Around 80 advisers have joined Sandringham in the last 12 months, but around 50 of Sandringham’s original partner base have departed the network as the company shifted its business model.
He says: “The real impact of that has been the better quality of people we have now seen – advisers who really want to drive their businesses forward. It’s about the partner understanding how to charge, and how to deliver value because the industry as a whole has really struggled with advisers not being clear around charges and value.”
Following the launch of its adviser academy in January through Redmill Marketing Associates, Sandringham also recently announced it will look to launch a gateway academy program by 2022. Until then, current Sandringham restricted advisers will be using the academy offerings to upskill.
Sargisson says: “Clients just want you to be able to deliver risk-managed good performance at a reasonable price, and a lot of the people we struggled with when we were restricted may see us now as a business they would happily partner with.”
Ascot Lloyd former chief executive Richard Dunbabin told Money Marketing at the time of the Bellpenny merger that he did not predict advisers would walk, saying they would be “more settled” under the combined business.
And while some advisers had initially showed scepticism after the rebranding saw the Bellpenny name dropped from the combined network altogether, Stockton says all advisers, including those from Ascot Lloyd’s most recently acquired IFA, Leeds-based Pantheon Financial, are settling in well.
Stockton says the majority of restricted advisers brought into the £6bn combined business were comfortable providing advice under an independent model that was backed by a well-known brand.
He says: “We asked our advisers and we also asked our clients and it was felt that Ascot Lloyd was a longer, more established name and the rebranding has gone down well with clients.
“The adviser team from Pantheon have fitted in to Ascot Lloyd in a way that some previous acquisitions haven’t and so that was also a really positive piece of news.”
Stockton says he is confident that under its independent banner, Ascot Lloyd will be able to double its business revenue in the next few years now that the merged business is starting to gain traction 10 months on.
He says: “The merger has given the company a scale of business neither had previously. Our turnover will be over £40m and now we are on the lookout for more acquisitions.
“We also hope now everyone in the marketplace knows that we are in a strategically strong place in comparison to 12 to 14 months ago.”
Whole of market knowledge should be critical for all advisers
A key decision for financial advisers is whether they should operate under an independent model or offer a restricted service.
It was widely predicted that RDR would lead to an increase in the provision of restricted financial advice due to the considerable commitment involved in providing the alternative ‘whole of market’ service.
Retaining the independent label is advantageous because the adviser is able to cater for the majority of clients, and this may encourage referrals to bring in more high net worth individuals.
However, these benefits need to be weighed up carefully against the cost of achieving compliance in the RDR world. Restricted advice has to meet the same standards for suitability, charging and professional standards as independent advice, with any restrictions disclosed in writing and reviewed in person with the client.
IFAs believe that there will be greater utilisation of a restricted model in the future, citing a lack of resources and the need to reduce costs as the main potential reasons for choosing this model.
In addition, the knowledge gap between those offering restricted and independent financial advice may not be as large as originally thought. This means whole-of-market knowledge will be required, even for restricted advisers.
For those firms that are independent, it will be vitally important that they have a clearly structured client proposition and that they can demonstrate clearly the ways in which they will add value to a client’s financial health compared with non-advice providers.
Andrew Clare is a professor of asset management at City, University of London