Many advisers are determined to cling to the independent tag come what may, but it could be a costly decision, writes Rebecca Murphy, director at North Investment Partners
Frequently rather more heat than light emerges in discussions on the subject of independent and restricted advice. Some suggest the distinction will have completely disappeared within the next five years, others remain adamant that having nailed their colours to the mast of independence, it is a principle they will not relinquish.
Certainly, with the advent of the Retail Distribution Review (RDR) the dividing line has become increasingly blurred. From a pragmatic standpoint, the questions to be considered are straightforward.
How does the adviser’s choice to opt for independent or restricted status affect their ability to address their clients’ needs? What are the implications for the adviser’s business? Is there an intelligible and meaningful difference to consumers looking for professional financial advice?
What price independence?
In the first quarter of this year Defaqto conducted studies among advisers, which revealed that the number planning to remain independent had decreased from 87% to 70%. Defaqto also suggested this trend was likely to be maintained. More recent information from the Financial Services Authority (FSA), following its survey of 1,436 advisers, of which 66% were independent, reflected that 88% intended to retain their independent status. Only 1% of the 34% of the sample that offered restricted advice responded that they would be likely to offer independent advice.
So, those advisers in the ‘independent’ camp are in the majority and helpfully, this dovetails neatly with the conclusions drawn from Skandia’s consumer study, which found that, of the 700 people questioned, the majority expressed a preference for independent advice.
To provide independent advice, the FSA requires that clients receive unbiased and unrestricted recommendations in relation to retail financial products based on a comprehensive and fair analysis of the relevant market. The definition for restricted advice is ‘other’ – essentially, that which fails to meet the standard for independent advice.
To remain independent, a company must be willing to consider all products, although if a firm has identified that they are unsuitable for individual clients’ needs, they can be discounted. The decision however must be client-led – and the FSA has noted that if the entire client bank has no desire for such products, there is no reason for the firm not to remain independent. For sure, the terms ‘ultra-high risk’ or ‘unregulated’ are anathema to most clients and the rare few who are interested may be referred to an external specialist.
Whatever the status of the adviser, come New Year’s Day there is no side-stepping the minimum level of qualifications required. Commission will no longer be permitted and ongoing fees will only be allowed if there is demonstrable ongoing service. The level of fee is flexible – for the adviser and client to agree – and statutory investor protection applies whichever type of advice has been received.
Somewhere between the re-interpretation of ‘independent’ as all-inclusive and the redeployment of specialist as ‘restricted’ lies advice that will genuinely meet the future needs of clients seeking financial guidance.
For businesses that have opted to provide independent advice however, the cost and resource implications for ensuring that the necessary procedures are in place may be significant.
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