One of the most profound consequences of the retail distribution review (RDR) has been the FSA’s decision to redefine the independent standard in financial advice.
This has meant many wealth management firms are now grappling with the realities of having to take on the ‘restricted’ label.
Under RDR rules, private client investment companies that do not offer life policies and pensions – which now fall under the FSA’s definition of retail investment products – will not be permitted to describe their services as independent. Similarly, firms that use models and internal multi-asset funds that do not cover all retail investment products might also struggle to meet the new requirements.
Even businesses that have in-house financial planning capabilities and can cover the whole range of retail investment products could still fall short of the rules, as the person in charge of the process of giving advice must cover the whole range of retail investment products, even though they are unbiased and extensive in what they do cover.
Vestra is one business that has faced this dilemma. The firm offers investment management and financial planning services and can cover all of the relevant areas to meet the new independent standard, as its process entails multiple advisers or specialists dealing with the client, rather than one person with overall responsibility for the totality of the advice.
Yet it has reluctantly opted for what founder David Scott describes as a ‘cautious interpretation of the guidance’.
‘We have no choice, as we see it, but to be restricted,’ he says.
Nonetheless, Scott says choosing not to change Vestra’s process to meet the rules is the right decision.
‘We believe one person cannot have the knowledge to do this; indeed, we offer the two services of portfolio management and wealth planning as separate services. The client can then decide whether they want one or both. A combination of wealth planning and portfolio management will ensure that the entire market is covered,’ Scott says.
Vestra is not alone. Wealth management companies across the piste from the national firms through to the boutiques will now be labelled restricted under the new rules. They include Brewin Dolphin, Quilter, Rathbones, Close Brothers Asset Management and well known boutiques such as Cheviot and Berry Asset Management.
Nonetheless, businesses operating in the restricted universe have been dealt a positive hand following the Solicitors Regulation Authority’s (SRA) decision to allow referrals to restricted advisers, which followed a similar decision by the Institute of Chartered Accountants in England and Wales (ICAEW).
If a large portion of the wealth management profession is restricted under the new regime, and solicitors and accountants can continue to refer on business to restricted firms, is there any value in being independent any more?
Chris Macdonald (pictured), chief executive of Brooks Macdonald, believes the new independence rules are overly complex and reverse the headway made in the last 10-12 years in explaining to consumers what independent financial advice actually is.
Under the new rules the company is restricted independent, as its asset management division (which provides discretionary investment services) is restricted, while its small in-house advisory business, which accounts for 7% of turnover, covers life products and therefore can meet the independent standard.
Macdonald says an RDR II could well be necessary due to the confusion created by the new independent definition.
‘I am a big fan of the RDR but one of the [intended] outcomes is consumer clarity and in this particular case, I am not sure there will be consumer clarity,’ he says.
‘I have heard people saying they will be restricted independent, or restricted specialist. I don’t think this will be any clearer for consumers.’
His sentiments are echoed by Vestra’s Scott, who says: ‘There is a danger that the interpretation of what is required to be independent will be different to what many clients understand by independence in normal parlance.’
Meanwhile, Close Brothers Asset Management’s chief executive Martin Andrew says his firm will be ‘restricted and proud of it’ in the new RDR world, but suggests the regulator should review the basis of its new definitions.
The company is restricted as it has an internal unitised multi-asset fund range. Andrew views this criteria as arbitrary, given that firms that have model portfolio services but no internal funds will be independent, even if both types of firm take a whole of market approach.
Nonetheless, Andrew highlights Close’s whole of market and unbiased approach to underlying fund selection. ‘If we did not have funds in our proposition, we might be able to argue we were independent. That seems an odd anomaly, so if there was an "RDR II" it would be interesting to see if that was addressed.
‘I don’t see the difference of having something that is wrapped in a fund or a model portfolio. It has the same risk-return profile and exactly the same securities holdings. What relevance does whether it has a tax wrapper around it have?’ he asks.
Nonetheless, the firm is pleased it did not change its proposition to avoid the restricted label, as this could prove short-termist and not in the spirit of the rules.
Simon Lough, chief executive at Heartwood – which will be restricted post-RDR as it has an internal multi-asset fund range – stands by the decision he made three years ago to not adapt the firm’s model to meet the rules, particularly following the SRA and ICAEW’s decision to allow restricted referrals.
‘This is exactly the view I took when I became CEO three years ago,’ he says. ‘I looked at this and felt it was not going to benefit our clients to be independent.’
While Lough is very positive about the principles underpinning the RDR – not least improved transparency and the removal of trail commission – he believes the FSA’s decision to change the basis of independence could prove a mistake as it is confusing for consumers.
However, he has been encouraged by comments made by Martin Wheatley, chief executive of the incoming Financial Conduct Authority, at a recent conference, telling investment managers they should not fear being restricted as clients would be aware of the services they require.
Regulation has driven consolidation, particularly on the back of increased regulatory costs and scrutiny, and caused some to change their models by moving into new markets or areas.
This is particularly evident in the number of traditional investment management firms that have moved into financial planning through acquisitions, strategic partnerships or hiring in teams, while others have sought to pick up assets from advisers looking to outsource investment management by launching model portfolios and unitised offerings.
While the RDR is creating opportunities, some are concerned about the longer-term consequences of regulation driving business models.
Paul Killik, founder of Killik & Co, is particularly concerned that if regulation is driving consolidation, it removes competition and choice for consumers. He also fears it is stifling innovation and competition.
‘This has all the obvious contrary effects on pricing and choice. The problem is that we are not getting new businesses coming through,’ he says. ‘The green shoots are not there because it is a heck of a job starting a business up.’
Michael Maslinski, a consultant, fears regulation is driving the industry too far towards standardisation.
‘I don’t want to knock the suggestion that things need to be properly documented, but I do want to knock the idea that things need to be standardised,’ he says.
He also warns on the negative implications of reacting to shorter-term regulatory pressures.
‘It often forces institutions to do things that are inappropriate. When the regulator becomes an adviser, there is a big danger that regulators are running the advice industry and they must stand up and be accountable for that advice,’ Maslinski says.
However, others hold a more upbeat view on the consequences of the RDR. Close’s Andrew says the RDR has caused firms, particularly those that are restricted, to evaluate and communicate what their proposition entails, and this should benefit the underlying client.
He adds it has given the industry the impetus to spend a lot more time communicating to clients the actual substance of its proposition and what it does.