View more on these topics

Peter Hamilton: Charging fees sets advisers free

In this column last month, I discussed the legal and regulatory duties and obligations which arise for professional and independent advisers in general and for IFAs in particular.

To recap – advice, in the context of professional advice, means the opinion or counsel of the professional person as to the appropriate course of action for the client, having taken into consideration the relevant facts, the client’s wishes and objectives and other matters, such as the tax consequences, in as dispassionate and objective a way as possible. Independent advice must be unbiased and unrestricted, that is, not limited by any agreement with any other person, such as a product provider.

The first duty of a professional adviser is to carry out the job he or she promised in the agreement entered into with the client. In all that is done for the client, the adviser must act with due skill, care and diligence. Further, the adviser must always be loyal to the client so that the client can have trust and confidence in the adviser. Normally, in meeting the appropriate standard of care, the adviser would comply with all relevant regulatory rules.

All that sounds daunting, but last month (although I used different words) I ended by saying that as long as an IFA acts carefully and diligently, he or she should have nothing to fear from either the law or from the regulator.

Before going on to consider the question of independence further, it is instructive to consider what constitutes a profession.

In 1970, the Monopolies Commission identified seven characteristics, most of which were necessary for an occupation to be a profession. The two most important were:

  • Practitioners apply a specialised skill enabling them to offer a specialised service; and
  • Practitioners are organised in bodies which, with or without state intervention, are concerned to provide machinery for testing competence and regulating standards of competence and conduct.

If one regarded the FSA as the state for this purpose, both those characteristics are broadly true of IFAs, particularly as a result of the FSA’s rule changes following its retail distribution review. The other five characteristics are also worth summarising:

  • The skill has been acquired by intellectual and practical training in a well defined area of study;
  • The service calls for a high degree of detachment and integrity on the part of the practitioner in exercising his personal judgement of behalf of his client;
  • The service involves direct, personal and fiduciary relations with the client;
  • Practitioners collectively have a particular sense of responsibility for maintaining the competence and integrity of the occupation as a whole; and
  • Practitioners tend or are required to avoid certain methods of attracting business.

About 100 years ago, the great social reformers Sidney and Beatrice Webb said that a profession “is a vocation founded upon specialised educational training, the purpose of which is to supply disinterested counsel and service to others, for a direct and definite compensation, wholly freed from expectation of other business gain”.

There is scope for argument on some of those points but, in general, they are reflected in how IFAs work today.

Earlier this month, the FSA published its finalised guidance on independent and restricted advice in the context of the RDR.

That guidance is welcome as it provides some further clarity but it has been published much too late, given that we are now only six months from the RDR rules coming into force.

So the question arises – is what I have said consistent with the FSA’s guidance? The answer is, yes. But, of course, the FSA has focused on its own new and updated rules as a result of the RDR.

To understand some of the detail in the FSA’s guidance and its consistency with the general law as I have outlined it, it is necessary to note that the FSA’s guidance is confined to independent advice to retail clients in relation to retail investment products.

A retail client is someone who is not a professional in the financial services market, in other words, a lay member of the public. And a retail investment product includes any one of the following: a life policy, units in a collective investment scheme; a personal pension scheme; an interest in an investment trust savings scheme, and any other packaged investment product which offers exposure to underlying financial assets.

In the FSA’s new rules, the definition of independent advice is as follows: “A personal recommendation to a retail client in relation to a retail investment product where the personal recommendation provided meets the requirements of the rule on independent advice.” See Cobs 6.2A.3R.

That statement on its own is circular – it is saying that independent advice is independent advice!

But the rules go on to say that the rule on independent advice is that for a firm to hold itself out as acting independently, the only personal recommendation it can offer to a client must be:

  • “based on a comprehensive and fair analysis of the relevant market”; and
  • “unbiased and unrestricted.”

Further, in order to comply with the standard of care required by the ordinary law, when formulating that personal recommendation, the IFA must act with that degree of skill, care and diligence that would be applied by a reasonably competent IFA in the circumstances.

The FSA’s guidance on what constitutes a relevant market is it should comprise all the retail investment products which are capable of meeting the investment needs and objectives of the retail client. So, for example, if the relevant market includes products from abroad which are widely available to UK consumers, the IFA should include them in the necessary analysis of the market.

It is also important to note that the FSA’s guidance in its Handbook specifically says that an IFA should consider relevant financial products, other than retail investment products, which are capable of meeting the investment needs and objectives of a client, such as national savings and investment products and cash deposit Isas. On the other hand, if a client says that he is only interested in ethical and socially responsible investments, the adviser can exclude from the relevant market all non-ethical investments.

Crucially, therefore, the relevant market is defined by the client’s investment needs and objectives and not by product or service types. Further, it may be possible to decide early on in the process of advising a particular client that certain product types are inherently unsuitable and can therefore be disregarded.

It goes without saying that to be independent, an IFA must not be bound by any kind of agreement with a product provider. The independence must be from all kinds of influence which could or might have an impact on the advice to the client. Fundamentally, the client must pay for the advice and usually that will be by an agreed fee.

At the heart of the independence issue is the adviser’s attitude or mindset, and the issue of how to charge for the advice is central to that attitude.

The charging of fees sets the adviser free. He or she truly becomes an independent financial adviser. There is no question of having to sell anything in order to earn a living. The IFA is providing a service for which a fee is charged. It is then possible truly to provide advice which is “disinterested counsel… to others”.

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court and co-founder of


Quorum picks from best of breed

Discretionary fund manager Investment Quorum says it selects the core funds for its model portfolios from a best of breed fund list to save time researching a fund when it wants exposure to a specific market. The DFM says as it is a small company it does not have a big research team. Keeping its […]

Henderson plans more fund mergers

Henderson Global Investors is planning a third tranche of fund mergers later this year. Henderson’s head of UK retail Simon Hillenbrand says the next round of consolidations – part of the firm’s rationalisation programme following the acquisitions of New Star and Gartmore – will probably happen in the fourth quarter of this year. “Over the […]


Govt may launch review into banks’ professional standards

Bankers’ behaviour could come under the spotlight if a mooted review of professional standards in the industry is confirmed this afternoon. In a statement to MPs later today, Chancellor George Osborne will confirm whether an investigation into bankers’ professional standards will be set up alongside the inquiry into how the Libor rate is set. Labour […]


FSA ‘happy’ with plans to divert fine money to Govt coffers

The FSA says it is happy the Government intends to divert the proceeds from enforcement fines to the taxpayer and away from reducing industry fees. Chancellor George Osborne has announced plans to ensure the proceeds from enforcement fines go to the public purse and not the financial services industry. The rules would apply to fines […]

Europe: why persist with value today?

By Rob Burnett, Neptune’s Head of European Equities The Neptune European Opportunities Fund remains committed to a value bias. We see a broadening array of opportunities in diversified industries at compelling valuations today. The most complicated part of the market is the European banks. We are currently overweight in this sub-sector as many banks are […]


News and expert analysis straight to your inbox

Sign up


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

  1. What a great summary of what it is to be an IFA.

  2. ‘Summary’ it certainly is not, excellent and detailed explanation in full it is.

  3. Exasperated Me 4th July 2012 at 10:43 pm

    I bet he never said anything of the sort when he was at Hambro Life.

Leave a comment


Why register with Money Marketing ?

Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

News & analysis delivered directly to your inbox
Register today to receive our range of news alerts including daily and weekly briefings

Money Marketing Events
Be the first to hear about our industry leading conferences, awards, roundtables and more.

Research and insight
Take part in and see the results of Money Marketing's flagship investigations into industry trends.

Have your say
Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

Register now

Having problems?

Contact us on +44 (0)20 7292 3712

Lines are open Monday to Friday 9:00am -5.00pm