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Nick Cann: Independent thinking needed on independence

The debate about independent and restricted advice has taken a new course over recent weeks with the publication of the latest updates by the FSA.

Emotional attachment to the philosophy of independence is strong. Many have built their business and reputation on an ability to put the client’s interests first. The latest papers set out the requirements and expectations for the new independent. As ever, this only represents guidance and interpretation is still needed ahead of any implementation.

There are a number of questions that businesses should now be asking themselves ahead of deadline day and these should be asked with some emotional detachment and an element of pragmatism.

After 2012, all investment advisers need the same minimum qualifications and all will be subject to the same basis of remuneration. The difference will be around advertised product selection and whether the business considers all product areas or has considered their position and abilities and chosen a range of products to deliver their solutions.

Surveys suggest most intend or expect to stay independent in 2013 but there are some things to consider. Also, it pays to start with the client, which is still unusual for many in financial services.

Good businesses should be considering what their clients want and are prepared to pay for before they establish their proposition. Next, they need the right people to be able to provide the proposition and to ensure it is compliant and profitable. At this stage, it makes sense to consider whether this is independent or restricted.

There are some other issues to consider in remaining independent. Does the business have the resources and the processes to ensure they can prove they have assessed the whole market for their clients? It is easy to meet the regulatory requirements but is it needed and worth the extra cost and risk?

Having done the analysis above, does the natural solution look like financial planning with a naturally restricted range of solutions for the clients that the business serves?

One further consideration for the business is professional indemnity insurance. There are suggestions that the market is hardening. If businesses are holding themselves out to be independent in the future, it is implicit in this that they consider all product areas, which has to increase the premium with all other things being equal. This may be a cost worth paying but make sure a full dialogue has taken place before decisions are made.

Many IFP members and accredited financial planning firms have gone through the transition exercises discussed and more. Ideally, independence is the preferred option but over the years there is an acceptance this is not what is really important to their client nor necessarily what they deliver.

Is the client seeking independence or an individual and business they can trust to look after them and their family, to help deal with the life and financial challenges ahead?

It is important to ensure this, along with compliance and profitability factors, drive the debate and not decisions based purely on emotion.

Nick Cann is chief executive of the Institute of Financial Planning


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There are 7 comments at the moment, we would love to hear your opinion too.

  1. Good article – I wonder what percentage of current IFA’s use only Pensions, ISA/OEIC’s and or bonds as solutions to clients needs and for how many years have they been doing this very successfully? I would submit that the VAST majority of us have been doingthis for a very very long time and are likely to continue to do post RDR. Why then would we want to increase time needed to complete much more in depath research/rejection tools and costs to have to pass on to our client’s to continue with more of the same. It really does not make commercial sense to me. So we have “restricted” in the firm’s name, so what? We will still remain “independent” in our research, provider and product recommendations so most clients will notice no difference to the business relationship they have enjoyed for years. (New clients wont know any different). Surely its about making a reasonable living from the advice we give whose logical conclusion ends up with a SALE. There I said it…. the dreaded “S” word. When it boils down to it is it not that simple? If we think about logically there has to be an end product to be bought. Maybe I am missing the point and if I am then I would be grateful if someone can help me out here.

  2. Marty maybe you have missed the point regarding the need for a SALE.

    What taxes us most now and post RDR, is how to be paid for our advice and not for the sale of a product.

    For example if, say, you recommend that a client takes out life cover, you provide him with a comprehensive report etc etc etc and a meeting and he is then turned down or loaded by the insurance company and so does not proceed, how can you then turn round and make a charge equal to the commision you would have earned by the SALE of the product – maybe £900 plus?

    We are still tryng very hard to educate clients about the value of the advice as a separate issue to the product that may result.

    The fees that you can earn this way are much lower than the commission for the sale of a product but you give better service to the client and a cheaper product in most cases at the end of the day.

    There are many good things about RDR – not least that at last we will be free from clawbacks and be totally independent of providers. However it has come at a very bad time economically – many clients have less money to invest, less in their pensions and their houses are worth less. To try and make major changes to the way you run your business, plus take on increased levys for things you have no responsibility for, pay your taxes and keep your staff is a hard thing to do.

    It may be that restricted advice is going to be the way forward for many of us, and as the comments above state, clients will not be woried at all by this.

  3. Nick has hit the key points on the head. Just hasn’t quite got the priorities and order right. The most important issue is the client. What he or she wants and needs is the driver. It’s the conversations between and user and the client which must draw this out. Of course this isn’t always easy for adviser or client. Both are often locked into traditional power relationships. It’s an awkward path but the destination is worthwhile. The client’s informed consent to their plan, the risks in their plan and the risks in their investments. All else follows.

  4. One further point I have not seen any comment on is the attitude of the Law Society and Institute of Accountants. Many businesses are established on referrals from professional contacts who can only introduce to Independent advisers/planners. What will be the instruction to members from these bodies – leaving aside if they understand what is going on.

  5. @Anonymous 11.06am – if you are talking about non-investment protection this isn’t covered by RDR or Adviser charging at all. So cary on selling and taking commission if you want.
    Anyway, there is nothing to say that if for any reason the client doesn’t, can’t, or won’t proceed for any reaso, you have to charge a fee. You can, as now, decide that you will only get paid / cover the costs of advice / charge your fee / set up the adviser charging facility if the product actually gets implemented.
    I personally think that the “sale” should be the “advice” with products secondary to the discussion – but if you want to do bits of your job for free, or make payment for all the value you add to clients contingent on actually selling a product, then carry on. Not good business, in my view, but your choice.

  6. Is it a binary decision by PII underwriters that a well-run independent business is higher risk than a badly-run restricted business?

    Restricted works from a product view but independent has to work from a clients perspective.

  7. @ Paul Resnik : the client comes first. But if I’m a Restricted adviser something else came first – the decision about what products or providers I knew would never ever form part of my client recommendations. So how exactly does the client come first if I determined before I ever met them and discussed their wants / needs / objectives what the answer was going to include (or more importantly not include)??

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