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Independence does still matter

by Daniel Grote on Dec 04, 2012 at 10:00

Independence does still matter

After the Solicitors Regulation Authority’s (SRA) belated and seemingly inevitable announcement that it would allow solicitors to refer to restricted advisers, does any value still lie in independent status?

With accountants having taken a similar stance on referrals, it seems the business case for remaining an IFA has waned. What then is left to engender loyalty to the IFA brand? Is it merely, as some have suggested, an irrational, emotional attachment to the name among advisers?

Well, no. As Sifa’s Ian Muirhead argues in his analysis of the SRA’s decision, the notion of independence still resonates with the public no matter how the term is defined by any regulator. The public understands it in its most straightforward sense: freedom to do what is best for the client’s interest, without constraints imposed by any third party.

It’s heartening to see that many members of the legal profession share advisers’ commitment to independence, even if its regulator doesn’t. And while the Law Society’s concerns about restricted referrals weren’t enough to change the mind of the SRA before it issued its verdict it could rally commitment to independence in spite of the ruling.

Concerns that the retail distribution review’s independence requirements are too onerous have largely been voiced by those with a vested interest in restricted advice, while the regulator itself has consistently emphasised how attainable the new standards are. Next year will not bring a decimation of the independent sector; but the perception that it will is being used to drive a land-grab by those who have never met the standard.

16 comments so far. Why not have your say?

Ian Watson

Dec 04, 2012 at 10:52

Independence does still matter . . . but to whom . . . obviously not Solicitors . . ?

Whilst I fully support the "Independent " status, I was Tied for the first 4 years of my career, and was NEVER asked by any client whether or not I was Independent. This was even though it was drummed into us that we must explain our "tied" status in great detail to clients at the outset

Whether that means they did not know the difference, or did not care, I don't know, but as I was also never asked about my qualifications, does this mean the Govt need to explain the difference to the masses for the whole RDR initiative to be effective ?

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Gillian Cardy

Dec 04, 2012 at 10:55

Which is why it is now more important than ever to ensure that the voice of the Independent adviser is heard, not just within the profession but externally too.

Initial legal advice suggests that there are grounds to challenge the way in which the decision was made - but they were so heavily influenced by all the talk (objection : hearsay evidence, your honour) of there being only a handful of IFAs left after 31.12 and those remaining only bothered about advising the high net worth community, that the rule change was, as you suggest almost inevitable.

It is now clear : there are those who say that there's no difference between Independent or Restricted, and there are those who say that Independent IS different and it DOES matter, to clients, advisers and other professionals alike.

If you agree with IFA Centre members that Independence does matter then please consider joining us and making sure your voice is heard.

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Stanley Kirk

Dec 04, 2012 at 11:51

Please will commentators define which version of 'independence' they mean. For FSA regulations by law it has a very narrow (indeed 'restricted') meaning of "do you consider every product for every client?". To the public it has a much wider meaning of 'are you an independently managed business able to make up your own minds what you recommend to clients out of all the products available?'. The latter definition can be true for 'restricted' advice but is not sufficient to meet FSA definition of 'independent'. The days of 'independent' or 'tied' have gone!

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Gillian Cardy

Dec 04, 2012 at 12:14

It is not about every product for every client - to persist in promoting this myth does not help. "Many products are unsuitable" and independence in driven by client needs, not by a pre-determined list of which products or providers you will or will not consider.

Restricted actually now shines the light on restrictive advice practices that go way beyond the old "tied" or multi-tied" distinctions ... pay to play and panels being two obvious culprits ...

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Scott Taylor via mobile

Dec 04, 2012 at 14:35

I am always bemused by the so-called IFA's and their claims of being superior to restricted advisors. I have very often seen clients who were with IFA's prior to being seen by me. The poor client did not have a clue as to why they had recommended the funds they had, they had no clue as to what was the basis of their research in choosing the right fund managers. The truth is that a small IFA firm simply cannot properly research the whole market and make unbiased recommendations. What is required is a dedicated investment committee that has access directly to the fund managers, can understand their strategies face to face and then get those managers to work for them on a contract - exactly what St. James's Place does.

To the IFA's with a holier than thou attitude, I would like to ask a simple question - how do you actually choose the funds you recommend from the thousands out there? Based on past performance I guess, as you do not get to speak to the fund managers. So, the outcome for the client depends on the right funds chosen for the portfolio which can neither be done by IFAs nor by banks. St James's Place had the answer - search the best fund managers from the worldwide whole market, not just UK.

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DG

Dec 04, 2012 at 14:49

@ Scott Taylor

"search the best fund managers from the worldwide market"

Based on what? Let's hazard a guess - past performance?

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Ian Watson

Dec 04, 2012 at 15:29

Scott,

I was multi tied but am now IFA as I wanted to deliver solutions that were right for my client and / or competetively priced. The tie would not allow that.

There were times when an at least equal ,or sometimes superior, product was available that I could not access for my client . . . or was cheaper elsewhere. That gave me a moral dilemma.

I think we all have something to learn from SJP and other multi / ties about sales, marketing and business process / submission, but not necessarily about meeting client needs most ( cost ? ) effectively. Clients have other needs besides Investment, and getting value for money is invariably one of them, including for their protection products.

I am not against the SJP model per se. However, I attended 3 client recruitment presentations between about 2005 and 2009, but could never get a straight answer to my question " Are you Independent ? "

Why could they just not say " No" and explain the ties ? Is that because they secretly feel clients may be put off ?

Also, what exactly is meant by " direct access to the Fund Managers " ? Does that mean you can influence them, or just negotiate a good deal ? Do you really need to know whether Paul Read still plays football or Richard Woolhough prefers Merc to BMW before deciding who is on panel ?

There are good and bad apples in every barrel. I worked with some great tied guys and some bad IFA's - it is largely own to the individual. However, honesty with clients should be top of everyone's list of things to do.

By the way, our practice has chosen to have our own in house Ex fund manager reviewing our fund choices if we choose to go outside his recommended model portfolios . . . .

. . . . but I select the least expensive, but still appropriate, Pension, Protection and Mortgage products via independent sourcing systems . . . no panels . . . and even recommend an HSBC mortgage if it is cheaper for them than anything I can get via Trigold.

See, I'm a saint really . . .

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Stanley Kirk

Dec 04, 2012 at 16:11

I agree with Gillian that many products may be 'unsuitable' for a particular client but you still have to consider them, no matter how fleetingly, to decide that they are unsuitable in that particular case.

I also agree that some 'restricted' propositions may choose products with the best client outcome in mind and some may choose for completely different reasons - that is why the legal definition of 'independent' for financial services is out of date (it dates to the 1980's environment) and urgently needs reconsideration.

It was so much simpler when the 'law of agency' applied - you were either the Agent of the client (independent) or of your employer (not independent) and always legally required to act solely in the best interests of your Principal.

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Philip Melville

Dec 05, 2012 at 13:39

@ Stanley,

I think you will find that whenever a provider is involved in the remuneration process - adviser charging etc. then the Law of Agency will continue to apply making you the agent of the provider who is paying you.

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Stanley Kirk

Dec 05, 2012 at 13:56

@ Philip

I suspect that providers might disagree and argue that they are simply 'facilitators' in a remuneration agreed between two other parties but it does raise several interesting questions about where the law of agency - which as 'common law' is still there - fits in.

Could it be possible for a 'restricted' advice proposition to position itself as the agent of the client - I suspect that is could.

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Philip Melville

Dec 05, 2012 at 14:32

@Stanley

As I understand it where providers have already operated adviser charging and an issue has occurred - say cancellation - the providers have continued to look to the adviser to claw back any monies already paid out by them thus setting themselves aside from any adviser/client agreement.

The public will probably continue to assume that whenever a provider is involved in the relationship that they are dealing with that provider with the adviser simply being an intermediary.

Although I rarely have any dealings with providers these days it does seem to be an act of extreme optimism to think that they will have the ability to administer a potentially huge range of variable contracts.

My own opinion is that this system will collapse and force advisers to get their charges from clients in other more manageable ways which may well encourage independence after all.

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KB

Dec 09, 2012 at 21:22

@ stanley

The following is taken from FSA website:

"Here we look at some key differences between independent and restricted advice.

Independent advice

Advisers that provide ‘independent’ advice will be able to consider all types of retail investment products which could meet your needs and objectives.

Independent advisers can also consider products from all firms across the market.

Restricted advice

A ‘restricted’ adviser can only recommend certain products, product providers, or both. This means they might only offer products from one company, or just one type of product.

An adviser will offer restricted advice where they work with or for a product provider and only offer advice on the products that company offers."

Keys words are "will be able to consider" and not "must consider".

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Peter Lawrence

Dec 10, 2012 at 11:38

Whole of market matters. Independent doesn't.

As I understand it, an adviser could choose to restrict themselves to investment products across the whole of the market (but not other products). They would be "restricted" and it would be entirely proper for a solicitor to refer to such an adviser if that's what their client needed.

BUT the onus is on the solicitor to understand in what way an adviser is restricted, which is daft since it is not going to properly happen.

The basic issue is that the FSA have hijacked the "independent" word and that some advisers are still using the word in the IFA sense.

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Gillian Cardy

Dec 10, 2012 at 12:00

An investment manager who is restricted because they "only" advise on investments and who does not advise their clients on pensions or "life policies" which would include annuities and investment bonds, is indeed restricted.

Their advice is going to be restricted by virtue of failing to consider a subject that could be highly relevant to a huge number of clients.

And who is qualified (and more importantly in this context authorised) to advise a client whether they need pensions advice and whether their needs can be perfectly adequately met by seeing an adviser who will not address that area of their finances.

Yes, some clients may have that understanding for themselves (in which case why do they need someone to refer them to a financial adviser - they would surely know enough to make that decision for themselves?) and yes, some solicitors may have that understanding - but do we think that this level of understanding is wide enough to agree that the relaxation of the rule will not lead to inappropriate advice being given??

Independent has for many years meant "whole of market" and offering clients a fee option. Nothing has been hijacked - it's just very much more obvious now where restrictions, by product AND / OR by provider (a point which passed the SRA by) apply - and clients deserve to know about it.

And as one research project quoted an interviewee who said “Why would you go to a restricted adviser when you can go to somebody who will search the whole market?”.

Quite.

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DG

Dec 10, 2012 at 14:01

@KB

The FSA website may say “will be able”...etc,. but the FSA Final Guidance on this states, quite categorically: “We expect, therefore, that the majority of firms providing independent advice will need to be able to provide advice on all types of retail investment products.

Key words here are “able” and “all”.

Now I know there has been much written about the fact that, as an independent financial adviser, there is, in fact, no need to deal with every type of investment – it’s almost as if the FSA are simply pulling your leg when they state the above! This is, seemingly, the thread of hope that the majority of advisers who have stated they intend to remain “independent” are aiming to hang onto. And presumably they hope that this thread won’t snap under FSA scrutiny.

Following on from this, it seems it is also the intention of many an “I”FA to introduce a fairly simplistic system which they will rely upon to present to the FSA whereby they have, in fact, excluded a selection of products as being “unsuitable” for the vast majority of their clients. Well, good luck with that idea!

To be potentially competent to deal with the FSA’s definition of “retail investment products” it will be necessary for an adviser to have the same level of understanding, for each potential solution, as they have with the more mainstream products. This will inevitably require additional CPD, research, systems, notes (as to the reason for exclusion), etc, etc. Unless, of course, there is going to be nothing more than a passing nod to professional competence in all of these areas prior to deciding they aren’t, in fact, suitable for the majority of clients.

Now, bearing in mind the FSA are prone to declaring that black is, in fact, white after the event I doubt, somehow, that a vague process will work. Remember, if it isn’t written down the FSA basically don’t consider it exists – TCF I seem to recall.

So a very significant level of additional work is going to be required by everyone, despite their many years of experience (the factor they are possibly relying upon to exclude certain investments) if they are actually going to be genuinely capable of “providing advice on all types of retail investment products.”

The basic test, expounded by a number of wise-after-the-event advisers on these pages, of “if it’s too good to be true don’t touch it” ain’t going to work, IMHO. Especially if the FSA see loads of “I”FAs using the same simplistic approach.

Contrast that position with a Restricted adviser who makes a simple business decision to steer clear of certain products – usually the very same that are responsible for the motorway pile ups we’re all so keen to decry on NMA anyway. This is merely their starting position – one of risk reduction – if at all possible. Of course, it probably wouldn’t be necessary to do this if we hadn’t witnessed such regulatory failures and subsequent carnage but, as we have, it seems perfectly logical to elect to steer clear, at outset, from dealing in, say, SCARPS. Now, if it transpires there’s a damn good reason why a client might want a SCARP there’s absolutely nothing wrong with a restricted adviser guiding the client accordingly. Restricted does not mean tied.

The same applies for any of the other products the FSA have placed before us as possible solutions, including those that are not covered by PII – an example of commercial suicide if ever there was one!

If we as a profession cannot differentiate between a tied adviser and a Restricted adviser (who is simply limiting the range of barmy products they will deal with, at least at outset) next year will prove very interesting – especially when the first sacrificial lamb is slaughtered because, no matter what systems are put in place, if the FSA want to blame/censure/fine you they’ve just increased the number of traps by a very significant factor – and each one can, of course, be either black or white.

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Ian Watson

Dec 10, 2012 at 15:48

Advisers know the difference . . . the question is whether clients know.

Where are the " Are You In ? " style adverts explaining this on TV ?

How clear will "Restricted" advisers be with their clients as to the difference ?

I agree with DG . . . are the Regulators keeping it all very vague so that they can interpret ( and fine ) as they see fit ?

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