Having been a strong supporter of key elements of the RDR over the past few years, one of the most important aspects of its introduction has been that of clarity. This matters just as much to IFAs as it does to consumers.
It follows that just as consumers need to know exactly what their adviser will do for them and what the cost of that service will be, so IFAs have a right to be informed of what they need to do to be fully compliant with the new RDR rules.
Which is why, on the whole, I welcome the FSA’s recently-published factsheet, setting out guidance on many of the most important issues facing IFAs who are grappling with the RDR.
The factsheet should prove useful in terms of answering some simple questions that advisers need to know as they strive to retain their independent status. That said, I also think there are problems with the FSA guidance, which I shall come to shortly.
But first, I want to look at some of the positives. One of them is the requirement that IFAs at the very least have a mechanism in place that enables them to consider whether all retail investment products have been considered when considering recommendations to clients.
In addition, advisers must be able to show that if more esoteric options were not judged appropriate for their client, that at least they were “willing and able” to contemplate their suitability, where necessary.
At the same time, this is not an absolutist demand. For example, the FSA also states that if you are creating a suitability report for a client, you don’t need to set out in minute detail every product that you looked at and why they were not seen as right.
The primary requirement is to describe the suitability of what you are recommending – as well as its potential disadvantages.
I also agree that it is not possible – or credible – to use a single platform for all investment business. At the end of the day, a consumer can never be shoehorned into a single platform in exactly the same way as a limited range of products were never going to be right for all clients.
That has been one of the key lessons of the past 20 years and, ironically, the banks have been the biggest offenders when it came to getting things wrong.
The classic example here – which was originally flagged up by IFAs – was Barclays’ misselling Aviva Global Balanced Income and Aviva Global Cautious Income funds to thousands of vulnerable investors.
Another of the areas where clarity appears to be needed, although at this late stage in the day part of me wonders why, is the FSA’s clear and unambiguous statement that if advisers have not yet qualified with regards to their QCF level four qualification, any retail clients have to be advised by an alternative adviser until they have complied fully with the RDR. This too is welcome.
A further small piece of reassuring news is the fact that the FSA will not say anything, positive or negative, about IFA charging structures of themselves.
As long as an adviser is clear about why certain charges were applied – for example, why clients with less to invest are asked to pay more – then the FSA will not seek to interfere in that decision.
Where I have reservations, however, is in areas of the FSA’s guidance relating to what constitutes full independence. Here, the advice is at best unclear and, at worst, fraught with danger.
The first area is where a group of restricted advisers are collectively able to advise on the entire range of retail investment products and therefore wish to retain independent status.
If my reading of this is correct, on the whole I agree with the idea that it is “individual advice to individual clients [which] has to meet the independence rule”.
Therefore, the acid test is not whether the skill mix in the firm itself covers the full product range but the client’s advice package.
That’s fine, but where doubts enter my mind is over the answer to the next question, that of whether it might be possible to “outsource certain pieces of advice to other individuals and still remain independent”.
To my mind, the answer to that should be yes, in the sense that an IFA, or his firm, may not have the full range of expertise necessary to advise across the full range of financial options and I’m not necessarily talking about products now, that a client may need.
In such situations outsourcing is clearly necessary.
Yet the FSA’s response to this is “it would question whether the adviser can advise in this area and whether the firm is in fact providing independent advice”. Its only exceptions are for pension transfers and opt-outs and long-term care.
I think this is a mistake. Not only is the FSA perpetuating the notion that the primary function of an IFA is to advise on products, as opposed to holistically planning their clients’ financial future.
It also ignores the fact that IFAs have a duty to seek out the best advice options from any source – and if that isn’t available in-house, they have the right to go outside for that help and support. Time for a – belated – rethink.
Nic Cicutti can be contacted at firstname.lastname@example.org