There is a controversy building up after the FSA’s retail distribution review over advisers using Sipp and wrap providers in which they have a financial interest – usually an equity stake.
A few years ago, the focus was on regulating investment products and advice. Now it is increasingly on treating customers fairly. Sipps and wraps have come to the fore and will probably continue to be a bone of contention with the FSA which wants an unbiased approach by IFAs to finding the most appropriate provider for clients – best advice, in fact.
However, IFAs argue that clients can benefit if the adviser has a voice in the running of the providerIn an ideal world, the IFA’s advice should be totally unbiased and impartial. But that would require an IFA to look at the quality of the financial advice provided by other IFAs compared with his own and recommend the client to switch to one that he thinks provides better advice than himself.
That would be regarded as ridiculous but it is just taking objectivity to the ultimate extreme.
No decision is ever totally objective. There has to be a subjective element because everyone has a different viewpoint.
The IFA considers that his service is the best the client can get and does not look beyond that premise in providing advice.
Can he do the same when it comes to choosing a Sipp or wrap provider in which he has a financial interest?
If these were investment products, the answer would be an emphatic no. He would have to prove better than best advice. He would have to make a conscious decision in making the choice of what to recommend. With the Sipp or wrap provider, if he only uses the one in which he has a financial interest it is arguable that he is not making a choice at all, other than the initial one to use the particular platform.
Those IFAs who have taken this route could argue this is more justifiable in the context of a service than an investment. The quality of a service is much less easy to measure than an investment.
Also each IFA’s requirements are different. Many Sipp and wrap platforms will tailor the service to provide IFAs with their individual requirements.
Wrap, in particular, is a way of removing admin burdens so the IFA will want a platform that achieves this in the best way for him even if the direct benefit to the client may not be that obvious.
Yet, on the other side of the coin, Sipps, in particular, although they are a service, are now regulated so are effectively treated by the FSA as if they were a product, as part of the packaged product regime. So shouldn’t the same criteria apply to them as to other products, obliging the IFA to make a choice of platform for each individual client?
In addition, one could argue that there should be no financial interest in making that choice, otherwise the “better than best” philosophy should kick in, which is always going to be difficult to prove, particularly as financial benefit is bound to create a presumption of bias.
One must weigh up the pros and cons of the two approaches. In practice, having chosen a platform one has confidence in, whether or not one also has a financial interest, the IFA will seek to justify recommending a client to use that platform on the basis that the financial incentive of an equity stake will not override best advice and that he will, in any case, regularly review the market. Yet even then, it is never going to be possible to refute allegations of bias totally.
The question is whether a client has been disadvantaged by the advice and how are you going to prove that?
Perhaps the current arrangements, under which the relationship between the IFA and the platform has been fully explained to the client, who then agrees on using it in light of that knowledge and, if this is not acceptable, having an alternative available, is an adequate compromise.
Yet, even if the assent is fully documented, can one ever totally refute the underlying impression of self-interest in such circumstances?
In today’s world where there is a constant need to justify one’s actions, should IFAs potentially compromise the independence of their advice in this way?