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Why this IFA thinks he’s tough enough to advise on Ucis

Paying lip service to structured products and Ucis is not enough to be independent under RDR rules, and firms with robust processes need not shy away from them, writes Derek Stewart of SAM Wealth.

One month on from the retail distribution review (RDR) deadline my firm, SAM Wealth, is committed to remaining independent. For us, this means more than just paying lip service to structured products and, to a lesser extent, unregulated collective investment schemes (Ucis); it means actively considering the merits of these options for clients.

SAM Wealth believes remaining independent is in the best interest of our clients and our professional introducers. We have always believed in the value of independent advice, so to suddenly change our principles did not sit well with us.

We gave thought to the greater responsibility we are taking on to consider a wider range of financial solutions, and the resources and technical expertise this would require. We concluded we would potentially be short-changing our clients by taking the easier, less risky approach to the business by going restricted.

Derek Stewart is a managing partner at SAM Wealth.

Structured products show their merits

Take structured products as an example. They were tainted by mis-selling in 2008, when products with Lehman Brothers as a counterparty failed, and many advisers have avoided them ever since.

Looking back, however, while the financial markets sat stationary for a number of years, many structured products provided positive returns.

This demonstrates why they should be considered as part of an investment portfolio; otherwise it is one-dimensional.

Robust research and tight internal procedures are required for this type of investment to minimise the risk to the client and the business.

Risk-taking Ucis can pay off

The same goes for Ucis. They are high risk and are not suitable for retail customers. In the right circumstances, however – for example, with certified high-net-worth individuals – they could offer a valuable solution.

Our processes are rigorous when contemplating such an investment. It requires highly qualified people, who are experienced in dealing in these areas.

Independent versus restricted

Using structured products and Ucis will increase our professional indemnity (PI) cost. But if we are going to offer comprehensive advice to our clients and professional introducers, we need to take on some risk. If we shy away from risk, the consumer will only receive vanilla advice.

The restricted model will allow advisers to limit the areas or products on which they advise. From a business perspective, this could mean a more profitable but less risky model because they will not require the same resources or have the same PI costs by avoiding structured products and Ucis.

As expected, the banks, networks and nationals have opted to take the restricted advice route as they focus on their profit and shareholder return. It will be interesting to see how they describe their status because they cannot call themselves ‘independent’, but will be engaging marketing professionals to use clever words to make it sound similar without breaching the rules.

Value for money

Will restricted mean cheaper for the consumer? No chance. Many businesses will see this as an opportunity to increase their profits while introducing adviser charging. More passive portfolios will be introduced to reduce the annual management charge but leave room for increased adviser charging.

Independents will be challenged by the Financial Conduct Authority on whether they can meet the necessary criteria and many will be forced to become restricted. Our preference will be to remain independent because we believe we have the experience, the qualifications, robust processes and a compelling proposition that clients value.

Derek Stewart is a managing partner at SAM Wealth.