Financial planner and consultant Phil Billingham helps cut through the noise surrounding the FCA's definition of independence and examines what the term actually means in practice...
During the past few months we have read with interest, amusement and often incredulity when we see that people continue to misunderstand the Financial Conduct Authority's (FCA's) guidelines on independence.
We thought it would be useful to everyone to try to cut through all the noise and provide you with clear answers as to what exactly independence means in practice.
What are the recurring issues?
• People claiming that unregulated collective investment schemes (UCIS) and other non-mainstream pooled investments (NMPIs) are what's stopping them being independent. If you haven't read the FCA paper on NMPIs we would strongly recommend you do so.
• Confusion about how recommending (or not) specialist products, such as structured products, venture capital trusts (VCTs), enterprise investment schemes (EIS) and exchange-traded funds (ETFs) et al affects independence.
• When is it okay for advice firms to refer to specialists (internal and external) and what are the criteria?
So, the myths go something like this:
1. You can't be independent if you are a small firm;
2. The FCA wants us all to be restricted;
3. You must actively advise on NMPIs/VCTs/or whatever in order to ‘prove' independence;
4. You must only use a fund/company for up to 25% of your sales to remain independent.
In order, the answers are: rubbish; not true; really not true; and gibberish.
Let's take a step back for a moment and start at the beginning of the process, which is your clients and the suitability of the advice you provide to them. This is always going to be the primary focus.
Some firms seem to have put processes in place that suit the firm, but may not have fully considered the implications.
This was seen in the recent thematic review where the FCA found firms were shoehorning clients into a wrap or centralised investment proposition (CIP) far too soon in the process. The FCA is very happy for firms to use wraps and CIPs but they do not like this when it happens too soon in the advice process, i.e. at or before the first meeting.
The FCA has always been very clear that suitability of advice is where every adviser/planner should start out.
Therefore, we already know that UCIS and other NMPIs are not going to be suitable for the majority of our clients. The FCA has repeatedly stated these are almost certainly unsuitable for private clients.
The key point here though is that what the FCA has made absolutely clear is that you, as the adviser, must maintain your knowledge in the area of NMPIs in general, because if a client comes to you with a specific need that is suitable for them, then you need to have the ability to undertake the research and possibly provide the advice.
The other discussion we see often on blogs is ‘when is it okay to refer?' The main areas you can refer on are pension transfers, equity release and long-term care and mortgages.
Everything else you need to maintain the overview knowledge of the ‘relevant market'. Relevant markets are based on client need, not products. So these referrals do not affect independence at all. But it should still all be done in the client's best interests. Treating customers fairly applies here.
As a good example, pensions is not a relevant market (you could use a range of investment products to fund retirement), but ethical investments are.
Start at the top
What some firms have failed to grasp is that their whole approach should be top down and not bottom up.
Your starting point should be your client base. The majority of firms we speak to have clients with specific needs, mostly lower attitude to risk, so the majority of clients are looking at ensuring their money is safe and being looked after and reviewed on a regular basis. They really don't want to lose their money and are happy to see it grow in accordance with their attitude to risk.
So what do you promote? If this is your client base then what does your website say? Does it match your client base? What are you promoting to clients in terms of what you do for them? Is your website about the product or about the needs and objectives of your clients?
Let's finish off with a list of what an independent firm looks like:
• It knows that independence is a state of mind – and what its clients expect
• It has clear investment beliefs, which produce investment criteria
• These criteria are used to filter the vast majority of products and funds down to a shortlist
• This shortlist is used for the firm’s mainstream clients
• Outlier clients and their needs are dealt with on a case-by-case basis
• Due diligence is done on funds and products recommended, based on criteria, ignoring marketing material
• It ‘never says never' and keeps an open mind on new products and funds, but uses very few, and only does due diligence where required
• It has robust continuing professional development programmes, meaning its advisers maintain awareness of the marketplace
• It uses individual ‘specialists' to back up and support advisers, but all advisers can give (‘lead') independent advice. It will, however, sometimes change the main adviser a client deals with to better reflect their needs
• It uses technology to carry out research when required. This includes specialist software, but the firm does use Google as well
• It does use one or two platforms for most clients, but also uses a specialist self-invested personal pension provider, as it has found them more suitable for property purchase
What does all this mean?
It may well be true that restricted suits you and your clients – absolutely no issues with that, on you go.
But it may be important that your systems and processes will be designed to provide independent support to your client base, given their needs and expectations. In which case, we suggest the above process will help you to be independent as you have a thought-through process.
Phil Billingham and Susan Jordan are directors of the Phil Billingham Partnership
Will assess regulation
Client was warned of risk
Megan Butler keynote speech at Women in Finance summit
Market anticipates a May hike
Newly-formed Mobius Capital Partners