This year&#39s model

The final nail has been well and truly hammered into the coffin on polarisation with the publication of CP166.

Yet, while a depolarised world undoubtedly offers many opportunities for IFAs, providers and customers, it brings developments that have already attracted criticism.

But the changes are positive for IFAs. A year ago, there was real uncertainty and the prospect of the IFA disappearing almost completely. The only survivors bearing the name independent would be the minority who chose to be remunerated solely through fees.

A year on, we know that IFAs can maintain their independent status and still be paid commission. Their hand is also greatly strengthened by the extra flexibility they have as a result of the changes.

They can adopt more flexible business models, including hybrid models, so that they can adapt their business to meet the different needs of their customers.

Few in the industry expected this level of flexibility. CP166 goes well beyond simply enabling tied agents to adopt a multi-tied status. Indeed, a whole range of advice propositions are possible, enabling advisers to choose the exact business model they believe suits them and their customers best.

Because these options are not exclusive, there will be opportunities to develop hybrid variations, too, further increasing the number of ways that an IFA can choose to set up their distribution strategy. Yet, while many IFAs will be breathing a sigh of relief, increased choice and flexibility do not necessarily mean much to customers to whom the overriding effect of CP166 may be confusion.

Customers are unlikely to understand the differences fully between the various business models on offer and there is a greater risk of customers believing they are getting independent financial advice when in fact they are being serviced by a multi-tied agent.

At least, critics say, under the polarised regime, there was clearer separation between the IFA and the tied adviser. Alarmists suggest that depolarisation could lead us back to the confusion that was common in the 1970s.

But we only need to look at countries such as Australia, the US and the Netherlands, where depolarised advice regimes operate with a high degree of success. We have had considerable experience of operating in these markets as a manufacturer and distributor and we in the UK have got valuable insight from our sister companies in this area.

What becomes clear is that regardless of the country in question, the majority of customers are unwilling to shop around. Therefore, we are very likely to find that customers will accept whatever model is presented to them without fully appreciating the differences or feeling the need to find another adviser.

Indeed, our learning from the mortgage market, where we already have mortgage panels and deregulated term products, backs this up.

It may be that increasing numbers of IFAs will consider offering some of their clientele a multi-tied proposition. But the attractions of moving to a multi-tied model come at a price. Intermediaries who choose to shed their IFA status will no longer be able to get referral business from solicitors and accountants. For many, this seam of new business would be too valuable to sacrifice.

From an operational perspective, dealing with a limited range of providers potentially makes things much easier and, at a time when regulatory and insurance costs are on the increase, this could be a far more cost-effective approach for IFAs.

Ultimately, IFAs will need to assess the commercial implications of operating different business models. Many may decide that it is simply too costly to offer more than one proposition as well as being confusing to customers.

Many IFAs may decide to offer a single advisory model but those firms which are big enough and have a diversified customer base will see advantages in a hybrid which would enable them to meet individual customer needs. Affluent customers would be offered a whole-of-market proposition while regular customers would choose from a more limited range of products.

From a provider perspective, IFAs deciding to move to multi-tied status would present both opportunities and challenges. Clearly, they will compete to ensure they are one of the limited range of providers used by advisers.

The abolition of the better than best rule was seen by many commentators as a stimulus for providers to buy stakes in IFAs to secure distribution. This trend became immediately apparent following depolarisation in Australia in the early 1990s.

However, the safeguards replacing better than best in CP166 are aimed at ensuring that provider investment does not compromise adviser impartiality and this makes investing in IFAs purely for distribution purposes less attractive.

But depolarisation and its impact on distribution cannot be viewed in isolation. IFAs also have to contend with wider industry changes characterised by simple, low-cost Sandler products bringing greater accessibility and choice. The scale of change makes it even more important for IFAs to have a clear business plan addressing their distribution proposition and how this matches with the product mix.

Depolarisation will undoubtedly create opportunities for IFAs and product providers alike. Customers do in theory have greater choice but there is a clear risk of increased customer confusion. With volatile markets taking their toll on investor confidence, customers are in desperate need of reassurance.

This makes it imperative that IFAs and providers work together to grasp the opportunities contained in CP166 and continue to offer the best service to their customers.