The FSA will scrutinise how IFAs describe their services as part of its post-RDR impact assessment. PA asked four firms to explain how they will prove their independence…
From this year onward, consumers will know when they are receiving tied advice because their adviser will have to tell them. At least that is what the Financial Services Authority’s (FSA’s) requirements state.
Will firms follow the rules, or will ‘restricted’ advisers play down their status when asked by clients?
The FSA plans to carry out a thematic review in 2013 to ensure firms are describing their services accurately. As ever, the onus will be on ‘independent’ advisers to prove they are offering impartial advice, but how do they plan to do it? Here, four advisers explain their processes…
The FSA wants us to prove our independence? Fine, in you come...
‘How can you prove an absolute?’
Carl Melvin, managing director, Affluent Financial Planning
“Demonstrating that you are whole-of-market is a difficult thing. In theory, we must consider every conceivable potential investment.
We are currently putting together a document with our compliance department showing the product selection process. First, we look at the client’s objectives and risk tolerance. If a client is a moderate-risk investor, the more esoteric products may be beyond what they would require.
Other filters include: not understanding how the product works, or how costs are calculated for it. If we don’t understand the product, we don’t recommend it. The consideration process is an ever-decreasing funnel.
When we get to the level of product selection, the decision is outsourced to a paraplanning business. But the point is: how can you prove an absolute? How can you prove you’ve looked at every conceivable product?
The FSA has not made ‘whole of market independence’ definitive. It has not said: ‘if you’re on one side of the line, you’re OK.’ Showing that you have looked at every conceivable product – and documenting it – would take a considerable amount of time and resource.”
‘We trust our software’
Scott Grant, owner, Clear Financial Advice
“Our plan is to add a paragraph to our suitability reports explaining that every potentially suitable product was taken into account. That could be the whole gamut, from exchange traded funds through to structured products. We are signed up to everything that we think helps us to do our job, including all sorts of product analysis packages.
The thing with the FSA is that it wants to know about your ‘intention’. It focuses on best practice and ethical considerations, and if an IFA can demonstrate they are putting their client first and considering the full range of products – within reason – that should be enough.
No adviser is going to have access to every tied adviser’s range or every bank assurer’s products. From my perspective, there has been no guidance in terms of exactly how to demonstrate you are a whole-of-market adviser, unless I’m behind the curve.
We’re happy that we’re offering an independent service as it is clearly in line with clients’ needs, but we trust our software to ensure we are considering the full range of retail investment products.”
‘We are independent as far as we are able’
AJ Somal, chartered financial planner, Aurora Financial Planning
“We have a spreadsheet containing generic products – not specific offerings – which was set up internally and helps us to eliminate segments of the market that aren’t appropriate for the client.
This elimination is done during the fact find. Once we have ascertained the type of advice a client wants, we will look at their capacity for risk before consulting our analysis tools. None is completely comprehensive and this is why we rely on multiple tools. We also rely on our individual knowledge.
There might be some niche products that are excluded from the process, but we are whole-of-market as far as we are able to be. We make a note of this research process, detail every tool we have consulted and provide the reasoning for our considerations.
In my view, the FSA will be looking for proof of ability and competence, and we can provide that.”
‘We will make our considerations more obvious’
Ruth Whitehead, principal, Ruth Whitehead Associates
“As far as I am concerned, the RDR is an almighty fuss about nothing.
We’ve always been a fee-charging independent advisory business, and that is what we will continue to be and do. We have always been whole-of-market, though we will probably make our considerations more obvious by modifying our existing documents.
We may look to provide details of products which, frankly, are the province of the few in the initial documents we give to clients.
Similarly, the suitability report would contain a more detailed reference to these products than might have ordinarily been the case. We will also look to document and detail the breadth of advice more clearly.”
Say it straight
What does the FSA expect when describing an independent service?
2 Products must be selected in accordance with the client’s best interests rule: firms must be able “to demonstrate clearly why it feels a particular market, product, or class of products is not suitable for its clients.” (PS10/6, p.13)
3 Meet the FSA’s unbiased and unrestricted analysis requirement: especially when recommending their own product. For example, the FSA would be particularly vigilant of “firms recommending their own product or the product of a parent company as this would not be consistent with the unbiased standard.” (PS10/6, p.13)
Data quality is key
Granted leave to appeal the judgement