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The complicated issue of simplified advice

In the context of discussions about the new rules for charging for advice, the concept of simplified advice often arises as a possible way out of the difficulty of persuading a client to pay the appropriate fee for the work and time involved. The thought seems to be that if there was a special regime under FSA rules for a form of simple advice that was cheap to provide, clients would be prepared to pay for it.

But is it realistic to expect the FSA to provide such a regime and, given the weight of European legislation and the ordinary law, is it possible?

The purpose of providing advice is to give the recipient the benefit of the adviser’s views and ideas based on knowledge and experience. In the context of giving financial advice, the purpose is to propose a suitable course of action to meet a problem and to recommend a suitable financial product to solve, or at least mitigate, the problem.

In giving that sort of advice, the adviser has very probably provided a personal recommendation as defined in the FSA’s handbook, “a recommendation that is advice on investments and is presented as suitable for the person to whom it is made, or is based on a consideration of the circumstances of that person”.

It is worth mentioning that the above definition comes from one of the European Mifid directives and so the FSA is bound to regulate the giving of that advice. Once a personal recommendation is involved, the full force of the FSA’s rules on suitability, which also give effect to the Mifid directives, come into play.

As all advisers know, under the rules in Cobs 9.2, assessing the suitability of a recommendation involves obtaining information regarding the client’s financial situation, investment objectives, knowledge and experience in the relevant area of investment and appetite for risk.

The adviser has to undertake a full fact-find to get “such information as is necessary to understand the essential facts about the client and have a reasonable basis for believing, giving due consideration to the nature and extent of the service provided, that the specific transaction to be recommended meets his investment objectives, is such that he is able financially to bear any related investment risks consistent with his investment objectives and is such that he has the necessary experience and knowledge to understand the risks involved”.

A suitability report then has to be written. To do its job properly, this report has to record all the relevant matters that make the product suitable for the client. That is no mean exercise, especially in a complex case.

But even if the case is a simple one, the adviser still has to make a personal recommendation if the client is going to be persuaded to buy a product. If no recommendation personal to that client is made, the client may well wonder what he or she is being asked to pay for.

Once a personal recommendation is made, the FSA’s rules will inevitably apply. The adviser will have to write the suitability report.

Even in a simple case, that report will take a significant length of time to write. One way or another, the client has to pay for that service.

Ignoring the regulator’s rules for a moment, under the ordinary law the adviser will owe duties to the client. Assuming the adviser is independent, the overriding duty that adviser owes to a client is the duty to use reasonable skill, care and diligence.

But he can still comply with that duty if he and the client agree at the outset to limit the scope of the advice to be given. They could agree that instead of reviewing the client’s whole financial situation, the adviser is going to advise only on a limited area, such as how best to save some money every month. The answer is likely to be simple. The advice, consistent with having done his or her duty under the law, would therefore be simple.

The difficulty, even in the absence of the FSA’s rules, is that a professional adviser should always record his advice and the facts and reasons on which it was based and send a copy to the client. That is at least a matter of good practice because a contemporaneous record of the advice will go a long way towards preventing or resolving disputes in the future about what advice was given.

The question is whether there is any material difference between what the ordinary law, coupled with good practice, requires on the one hand and, on the other, what the FSA’s rules require.

The answer may well be that there is no significant difference. The express requirements of FSA rules on suitability are almost certainly no different from what would be required to satisfy the legal duty of skill, care and diligence. Even if the FSA were to find a way to create a special regime for so-called simplified advice, there is no certainty the courts would follow suit.

In any event, there are many difficulties with the concept of simplified advice. For example, what products would be included as being sufficiently simple to be the subject of simplified advice? What situations or scenarios would be sufficiently simple to be addressed by means of simplified advice? Would the client need to be told in advance that he or she was to receive simplified advice? What would happen if, in the course of a fact-finding interview with a client, some fact were to emerge that took the case outside the parameters for simplified advice? Would the adviser then have to warn the client he would now have to receive “full advice” and that therefore he would have to pay more?

The more the idea is explored, the more unworkable a regime for simplified advice sounds. No wonder the FSA has delayed its paper on the subject.

On the other hand, an adviser should re-examine his approach to clients and seek to simplify it as much as possible, reducing the time taken for the whole process from first client meeting to delivering the suggested product. The adviser could still discharge his duties and obligations under both the ordinary law and under the rules in the FSA handbook.

Most clients would welcome a simple approach, simple advice that is easily understood and a simple product that is also easy to understand. They would be particularly grateful if they were to be told that the cost of the advice was less than it otherwise might have been.

That leaves the difficulty of charging for advice, which has to be overcome in every case. The advice itself is not always welcome. By its very nature, objective, disinterested advice is not necessarily what the recipient wants to hear.

As Lord Chesterfield wrote in a letter to his son in January 1748: “Advice is seldom welcome; and those who want it the most always like it the least.”

Peter Hamilton is a barrister specialising in financial services at 4 Pump Court


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. We live in an age of unprecedentedly complicated taxation and pensions structures, allied to dumbed-down protection products available either online or via supermarkets at prices with the advice margin stripped out. Increasingly, I find clients taking the benefit of my advice on a suitable protection package and proceeding with my recommendations but, after just a few months, getting the same package elsewhere for a few quid less and cancelling what they’ve done through us. I imagine many other intermediaries are finding the same. Recovering costs from such people is difficult because it’s easy for them to claim financial hardship and omit any mention of the alternative products they’ve effected elsewhere. How do you prove in a court of law in this day and age that the clients aren’t lying through their teeth?

    For its part, the FSA has created a consumer redress environment that makes it easy and free to complain about past advice, with advisers vulnerable to attack for the rest of their lives. The FSA itself is able to wriggle out of responsibility for its own failings and oversights by way of the handy tool of regulation by hindsight.

    For decades, the banks have operated on the basis of simplified advice, or something very close to it, and all the data tells us that it doesn’t work. The FSA refuses to admit this.

    Personally, I dislike execution-only business because the scenario is usually that of a client with a bit of knowledge in one narrow area saying to me I’ve done my own research, I know what I want to do and I just want to use your agency to effect the transaction (on minimum commission). For me, that almost always raises a list of What about….? questions and I feel uncomfortably straitjacketed from the word go. In virtally all such situations, I turn such people away. (Best execution is another matter.)

    In reality, simplified advice is an aspirational sound-bite that will be found either to be unworkable in practice. Most, if not all, practitioners will wisely shun it. I, for one, see nothing in it for me. My services are based on the provision of full advice, Mr Client, and you can either pay for that or go elsewhere.

  2. I like this article. It highlights the issue well. It still does make the case for simple advice for simple needs and simple(r) solutions, which doesn’t always mean ‘simplified’.

  3. julian, the problem is they will go elsewhere. And while at the moment you will feel confident that you will have others that will pay for you in the end the reality for you and most of the ifa world is that they wont..

  4. mr client will go elsewhere julian..

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