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Take time to size up the new options

Since the bombshell of the FSA&#39s consultation paper on the abolition

of polarisation, the IFA&#39s dictionary is having to be rewritten.

Long-used terminology will no longer apply in the proposed

depolarised world and IFAs are struggling to disentangle the web of

jargon spun into CP121.

With many product providers dangling a variety of lucrative offers in

front of IFAs, they are quickly having to assess what alternative

business models would be up for grabs in a depolarised world and what

steps they would have to take to meet those criteria.

Franklin Financial Services partner Neil Franklin says: “IFAs have an

inclination to panic when it is not needed. We had it with commission

disclosure rules a few years ago and people panicked. The same is

happening now. IFAs need to react in a measured manner.”

Arguably the most crucial question facing IFAs, as they select which

of the six species of adviser they propose to become, is what it

takes to retain the right to call themselves independent.

Advisers who can make the transition to fee arrangements will have

the clear brand advantage of retaining the “independent” tag. Such a

move will mean that they will be able to continue to receive client

referrals from professional introducers such as accountants and


But can smaller firms survive this change? Roger Sanders Associates

principal Roger Sanders says: “The big issue for smaller firms is the

switch of the payment structure to preserve independence. Those that

can make that switch will do well. There will be advantages for those

who can make the transition.”

But the idea that only fee-based advisers will be able to call

themselves independent is a misconception that needs clarification.

The FSA consultation paper makes it clear that firms wanting to use

the “independent” description should be paid by fees or on the basis

of a “defined-payment agreement”.

The defined-payment agreement requires the customer to pay a fee to

the IFA which is determined at the outset of the meeting and agreed

before any chargeable work is carried out. This fee can be offset

against commission paid by a product provider.

IFAs can take some cheer that this fee can be expressed in a number

of flexible ways, such as a fixed total charge, a fixed retainer, an

hourly rate or an agreed percentage charge.

The FSA seems to be saying that this defined-payment agreement can be

as complex as the IFA wants, provided they are prepared to explain it

to a client before any work is done. It would seem that an IFA could

continue to receive payments akin to trail commission if the client

agrees this at the outset.

The advantages of offsetting a fee against commission are highlighted

by the FSA. A spokeswoman says: “If the customer pays cash or a

cheque up front for the fees, then VAT is payable in the normal way.

But if the fees are offset against commission under a defined-payment

contribution, then VAT is not payable.”

The IFA can receive commission up to the value of the agreed fee but

any commission over the agreed fee would have to be rebated into the

customer&#39s product or paid back directly to the customer. The FSA&#39s

proposals suggest that IFAs could also, with the agreement of the

customer, hold the money on account of future costs.

There is much confusion over the types of adviser that will exist in

the new depolarised environment. There will be the true independent

financial adviser, working on the basis of fees or defined-payment

agreements, and a range of other advisers who will no longer be able

to label themselves as independent.

IFAs who do not want to convert to the defined-payment basis and

continue to take commission will be able to sell products from the

entire market in exactly the same way as they do now, except they

will have to drop all suggestion of independence from their name and

marketing, as the regulator deems that this confuses consumers. The

FSA suggests that these advisers might want to call themselves

“authorised financial advisers”.

The multi-tie option would see advisers tying to a group of providers

or even to the entire market. The FSA describes both multi-tied

advisers and authorised advisers as “distributor firms” but says the

final name for this family of advisers will be defined at a later


Current tied advisers will be split into those offering only their

company&#39s products and those that gap-fill their product ranges by

adopting the products of other providers.

Just in case you, and the consumer, were getting to grips with what

all this means, the FSA is proposing a further development to create

a two-tiered system of advice. Although unlikely to come in with this

round of rule changes, this initiative would see a lower tier of

less-qualified advisers, termed “generic advisers”, who would advise

on a limited range of lower-risk, probably Catmarked products.

In the coming months, IFAs are likely to be offered some form of

lucrative deal to sign up to one of the above arrangements. But it

must be remembered that no one has foreseen all the problems these

models could encapsulate. Furthermore, the consultation process is

not yet over and what looks attractive now may have hidden pitfalls.

Nightingale Associates principal Michael Lockyer says: “IFAs should

not grab the offer of the first person to get their wallet out. IFAs

are confused and uncertain about the future and should sit back and

see how things pan out before getting tied to anybody.”


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