It is not surprising that the FSA has fastened on to the word “professional” in its retail distribution review discussion paper to describe those financial advisers whose business model resembles most closely that of solicitors and accountants. In doing so, it may be seeking to repair some of the damage done to the public perception of financial advisers by a series of misselling reviews.
Professionalism is the key to the rehabilitation of the financial adviser but it is doubtful whether the introduction of a new term for what everyone has for so long referred to as an independent financial adviser would be helpful. Equally unhelpful is the effect on the classification of other advisers.
The classifications arising out of depolarisation are regarded as unsatisfactory because they are contrived and overcomplicated. What is needed now is clarity and what does the FSA propose? Yet more classifications and greater scope for confusion.
The thinking seems to be that if a select minority of IFAs are to be elevated to professional status, the rest must be demoted to a lower rank. But since they will, after all, continue to be IFAs, it is the definition of the word “independent” which must take the strain. Hence, apparently, the pretence that independent might include tied advisers. What a travesty.
One thing that is understood by consumers is the concept of independence. One of the few positive outcomes of depolarisation was the requirement that independents should offer a fee option and the most sensible progression would to be require that in future they should be remunerated on a basis agreed with the client and any commission received should be surrendered to the client.
This is the basis on which Law Society rules have always required solicitor financial advisers to operate and it has also been enshrined in the FSA’s new Cob rulebook, which provides at 6.2.16 that all advisers who charge on a fee basis must ensure that “the value of the commission is transferred to the client”.
But the simplicity of this solution has eluded the FSA, which has instead based its definition of professionalism on attaining financial planning qualifications. Not only is this unrealistic but it overlooks the fact that qualifications are only part of what makes a professional.
One can understand the FSA’s wish to elevate the top tier of financial advisers to similar status to solicitors and accountants but the big difference is that, in the latter case, the major general qualifications come at the beginning of their careers and most go on to specialise. To require IFAs, as a pre-condition of being permitted to continue in their careers, to go through this grounding in subjects which may be of little relevance, because they have already elected to specialise, is more than unreasonable, it is probably a breach of human rights.
The sensible alternative would have been for the FSA to pursue the path on which it has already embarked – of requiring advanced qualifications for specialist areas of work.
As regards the missing ingredient in what makes a professional, this is the ethical dimension – the commitment to putting client interests above all other considerations. The FSA demonstrates its lack of understanding when it asks whether incentives should be given to encourage financial advisers to take the professional route. The reality is that professionals are instinctively professional and need no incentive to adopt an ethical stance.
Another flaw in the FSA’s thinking is to relate professionalism to the individual rather than the firm. This would permit a well qualified self-employed person working out of his back bedroom to claim a higher professional status than a well resourced firm combining complementary specialist skills. It also flies in the face of the FSA’s efforts to encourage the evolution of retail financial services from a cottage industry into more meaningful business units.
If accountants and solicitors are to be regarded as a template of professionalism, the FSA could do worse than note that they operate as firms, not as individuals, and it is the firm which imposes the culture and status which is recognised by clients. These firms have developed strong brand identities which provide reassurance and continuity to regulators and clients.
To suggest that independent advisers should be allowed to continue working cheek by jowl with tied salespeople or even to put on tied sales hats themselves from one client meeting to the next displays a lack of awareness that independent and tied activities are polar opposites. The aim of independents is to serve client interests and distance themselves from any payments or influence which might undermine that commitment. The tied or multi-tied salesperson works for one or more product providers. This is the only distinction which matters.
The FSA talks of the cultural environment of financial advisers in the context of treating customers fairly but seems in the RDR to have overlooked its own message. It also seems to have forgotten that one of its primary objectives is to provide clarity and simplicity to clients.
Ian Muirhead is managing director of Sifa