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Rule of dumb

Chadborn Baker & Kearle principal Peter Chadborn says advice given by a high-street bank has raised his fears that depolarisation will dumb down the advice process.

It is said that one of the greatest threats to IFAs after depolarisation is the birth of multi-ties and many of the big life offices will be concentrating their efforts and resources on this new channel.

One of the objectives of the new regulatory regime is to increase consumer confidence and promote public understanding in the financial marketplace.

This is welcome but my concern is that depolarisation may appear to achieve this in theory from the outside but what about in terms of real day-to-day advice?

The protection market has long been seen as one of the easiest areas to operate in. Once the benefits, term and cost were established, the adviser was assured an easy sale but what of the quality of cover?

A recent event has confirmed my doubts over the ultimate effectiveness of the new regulatory and depolarised era in relation to the quality of advice.

My doubts started with a phone call from a client after a visit to his high-street bank. The client has always had his mortgage with the bank and was in the process of moving home and acquiring a small further advance. The branch mortgage adviser sensibly recommended that he should increase his mortgage protection in line with his new borrowing.

My client replied that his IFA takes care of this area of his financial planning but agreed to hear what the branch adviser had to offer.

The recommendation was for him to cancel his two existing life and critical-illness policies protecting his existing mortgage and replace them with a new policy that would incorporate the additional borrowing.

The rationale behind this wisdom was that it would mean a monthly saving of a few pounds a month com- pared with the cost of keeping the existing policies and proposing a new one for the equivalent of the further advance.

My client’s perception was that all this was very plausible when he rang and asked me to arrange the replacement policy. However, appropriate analysis revealed that the main policy was taken out in April 2002 and had superior critical-illness definitions on cancer, heart attack and angioplasty.

My advice, therefore, was to retain the main policy and secure the superior CI definitions which would not be available today. Interpreting provider definitions can be subjective and should be undertaken with care but some changes are obvious and cannot be ignored. Nor should the options for utilising guaranteed insurability options be ignored, as they were in this case.

Major changes in CI definitions from the end of 2002 were shortly followed by significant rate rises from spring 2003 and many product providers left the guaranteed CI market which meant that little rebroking was done in this area.

More recently, providers have re-entered this market and CI cover rates have started to decline so rebroking opportunities are increasing.

Furthermore, previously single-tied advisers are finding themselves multi-tied and, with a huge marketing campaign behind them provided by their employers, are keen to fulfil their promises to their new panel members.

For these reasons, I see the issues surrounding the rebroking of critical illness or, more likely, life with accelerated CI becoming increasingly prevalent.

This scenario is far from uncommon but polarises the different approach taken by someone operating in a pure sales environment who is unlikely to see that client again compared with the approach taken by an adviser who is at least trying to give the best possible advice to their client whom they intend to be advising for a lifetime of financial planning needs.

One of the other objectives of the new depolarisation rules is to provide clarity to this advice. No objection there but I presume the same verbal advice given to my client could have been easily covered in a suitability letter or statement of needs if the cost of the product was cited as a motivating factor.

After all, how many clients would object to being primarily influenced by cost if they had not had the importance of benefits and features explained to them? A competent and experienced adviser should have no difficulty in explaining the potential loss of certain core CI definitions and be able to identify significant changes in particular products in a manner which could be understood by the majority of the public.

So, will the new regime legislate and enforce the quality of advice? In the March 24 issue of Money Marketing, Labour pensions minister Malcolm Wicks said: “The public wants simple, fast and low-cost financial advice and that is what we want to give them.” I will take that as a no then.

Having seen the difference between simple, fast and low-cost financial advice compared with detailed, comprehensive and moderate cost financial advice, my client is very clear on what he wants.

If the new regulation is to provide transparency, choice and confidence for the consumer, then it will only succeed if all distribution channels are held to account in the same way with regard to the sales process. If not, will the industry be facing further missselling headlines?

The challenge for the IFA is to prove that there is a clear differential between a sales process and a quality advice process. But an even bigger challenge will lie with the FSA to ensure that this brave new world of transparency and consumer choice does not mean a dumbing down of the advice process, with the victims being the very people that this latest regulation is designed to help.


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