There is still a lot of confusion and concern amongst firms around whether to be an independent or restricted advice business post RDR. The decision is going to be a fairly subjective one for most firms, and for that reason I can only offer an opinion alongside the facts as we know them now, to assist you in the process.
Before I start it’s really important I make two important points to provide some context.
Firstly, threesixty will support client firms to the best of its abilities regardless of the decision you make. We have no vested interest (financial, political or otherwise) in which direction you take. That isn’t the case for most, but it is for us. Our views on this subject are guided by pragmatic, business assumptions with the best interests of our client firms, and your own clients, in mind. We do believe we have a role to play in helping advisers look after the best interests of their clients, but at the same time we do not believe this should be coloured by any political agenda. A few people have suggested to me we have been pro-independent recently. In trying to balance that up I’m conscious this could be read as pro-restricted. I’m not trying to be either.
Secondly, threesixty has long argued that the definition of restricted advice is too broad, and will not serve consumers understanding well. Under the umbrella of restricted advice will be direct sales forces, tied agents, multi-ties, and many advisers who are operating as IFAs today and do not advise on esoteric investments. Because of the political agendas of various factions within the industry, a proper debate on the sense of this breadth has been hidden beneath a fog of petty and divisive squabbling which the regulator could easily ignore. These comments are, therefore, based on the situation as is, not necessarily what we would want it to be.
Our last survey, which we will re-issue following this article, suggested that 48% of respondents were ‘seriously considering becoming restricted’. The main reasons cited were the avoidance of advising or maintaining knowledge on esoteric investments which were outside of typical client requirements. It was about staying whole of market, but not stretching into the new product areas covered under Retail Investment Products. Significantly, a good number stated they no longer described themselves as independent anyway.
First some facts, some of which may surprise you.
Independence is at advice level, branding is not
You can decide whether your advice is independent or restricted right down at advice level. So why worry? Whilst this might seem to give you the endless flexibility you need to avoid making any concrete decision, you can’t call your firm independent unless every adviser and all advice given will conform to the independence requirements. That means that if you remove the word independent from your company name and all marketing literature, and subject to making the relevant disclosures up front, you can pick and choose when you give independent advice and when you don’t. In reality we don’t expect firms to take this approach as it is too complex to manage on a case by case basis, as if you do this you will still need to maintain all the requirements to give independent advice at all times. Remember, you can only keep the name independent if you never use restricted advice, so if you think restricted may play a part in what you offer going forward you may want to look at how you market yourself now and from 2013 onwards. Do you need to change your company name, stationery, adverts, brochures?
There will be plenty of IFAs who are passionate about continuing to give advice badged as ‘independent’. There is an emotional connection to the word which is entirely understandable as it has been the key word used to describe what they do for many years. I have noticed a considerable change in this in recent years, however. Many firms describe themselves as wealth managers, or financial planners, for example, and rarely use IFA. It has not been something they use to market themselves for some time, so there is no perceived value in using the word for them or their clients. Equally, advisers who have carefully managing the affairs of their clients over the years will have a relationship of trust with them which will always transcend whether they are restricted or independent. It’s about client perception.
The first part of the decision and one which few have gone beyond is an emotional attachment to the word independent. If you are passionate about this and really wish to continue to be independent then you should, of course, explore what is required. Meeting the standards is entirely possible for many, accepting there will be some more work involved. For the rest, it will be down to a purely rational decision based on the factors described below.
I’m not trying to belittle the importance of this more intuitive part of the process in any way. If you feel emotive about it, the chances are your clients will as well. It isn’t something you should ignore.
What extra benefit do you get by being ‘independent’
For some firms, whether they stay independent or not may just come down to a real desire to remain independent, or an inability to do so. There may be a marketing advantage to remaining independent, but whilst some investors fully understand what independence means I am sceptical as to how much of an impact this will really have given the demonstrable track record of success of non-independent brands such as St James’ Place. Whether we like them or not, they are well regarded and used by many wealthy individuals. What other factors should be considered beyond client perception?
Professional introductions is the biggest issue in my opinion. If you get leads from solicitors and accountants will these stop if you go restricted? Currently, yes. There has been no formal change to the rules yet so introductions must be made to IFA firms. Will this change? That’s pure speculation. Personally I think it will, as the regulatory bodies could change the word independent to whole of market and achieve the same ends. There will be plenty who argue to the contrary but they haven’t stopped endless introductions to SJP to date under the current rules. We have already seen most trade and professional bodies agree to accept restricted advice firms as the equivalent of independent, so I think it’s just a matter of time for the rest. But as I said, this is speculation, so if you are reliant on referrals from solicitors or accountants then I suggest you look to remain independent for very simple, commercial reasons, although this doesn’t mean having to keep independent in your business name.
What are the downsides?
There is some cost and hassle attached to remaining independent, although much of that is already borne by some firms. Initially, much of this relates to the products outside packaged products but under the definition of Retail Investment Products, which includes tax shelters such as VCTs and UCIS.
Whilst you don’t have to advise on these products, you have to know why you don’t want to advise on them, and when they might be appropriate. This isn’t insurmountable but needs to be factored into your CPD. As much of it has to be structured from 2013 onwards you might view this as no additional burden. Given the complexity of these products, however, it’s highly likely that to control any use of them you will need to run an investment committee to control access to them. That investment committee might never make a decision on individual product selection if they are just inappropriate for the whole client bank, but at the same time you should consider what would happen if a client is identified where this type of tax structure is appropriate. There is a danger that a number of firms create an investment committee on paper, for the purpose of remaining independent, and get caught out by the regulator or a client when it becomes apparent that it is a token gesture, with no evidence of process, agendas, minutes etc.
Researching specific specialist investments can be time consuming and expensive with no guarantee of success, so many firms will decide to go restricted as they don’t want the extra work and don’t see the value for their client bank. The more advisers there are in a firm the harder this gets from a supervisory control perspective, and this can ultimately result in more costs. Remember, a supervisor should be appropriately qualified for the role, so what might be minor inconveniences for the small firm can be amplified for multi-adviser businesses, and those with trainee advisers.
It is possible to structure your advice so that a joint approach is used to bring in additional expertise within the firm from those with the necessary experience to advise in esoteric areas, but this is subject to the requirements set up in GC 12/03 para 6.8 (reproduced at the end of this note). Again, this is a workable solution for some firms, but not for others, and adds an extra layer of operational control regardless.
We are putting together some more detailed guidance on the different scenarios where supervision within the firm will or won’t work, for example occupational pension transfers and long term care, and this will be with you shortly.
Professional Indemnity Insurance
As for more direct costs, it is likely that the PI market is hardening again, which will result in increasing costs and possibly more exclusions on policies. If the market hardens to its 2002 position, we will undoubtedly see a number of firms without cover for higher risk products, and whilst FSA has stated that those firms could remain if they choose to self insure, this is a potential catalyst to drive firms down the restricted route. We haven’t arrived at this state yet, I am only speculating, but early indicators are that there will be far more attractive premiums (over 50% reductions) available to those firms wishing to keep to the packaged product market, which is seen as less risky by underwriters. In fact, limiting the product range to a small number of pre-approved tax wrappers and investment solutions, which is what many firms using platforms already do is seen as the lowest risk model and likely to be rewarded by the lowest premiums. Less seems to be more for underwriters. Again, the higher your turnover, the more of a saving the reduction in premium will be. For those looking at retaining independence status we may see a move towards policies which will provide cover on a preapproved basis – i.e. cover all areas but for some higher risk product areas case by case approval being required to obtain cover. This could reduce premium costs and limit requirements for additional capital adequacy funds but increase the requirements for recommending complex products and, ultimately the cost of providing advice in this area.
Single Platform Solution
A number of firms have asked me whether giving restricted advice could be a way of adopting a single platform solution without any regulatory pressure to justify platform or product selection in every case. In theory, I think it could. Whilst I doubt that advisers would want to formally single or multi-tie to a platform for all business, the very fact that restricted advice covers everything from whole of market to single tie suggests that there would be a way of disclosing how your advice would work, which platform or products you use for your service as mandatory, and proceed without the need to provide whole of market or independent research on file for each client. This will undoubtedly be a controversial point for many, and I’m not sure if this is what FSA would have anticipated, but as long as the relevant disclosure is made then there should be no problem with this approach. Again, it will come down to how this is perceived by your clients. It’s important to note that if you adopt this approach you will still be expected to pass clients on who aren’t suitable for your platform to another adviser.
That’s a lot to think about. To sum it up in one paragraph – if you want to stay independent, if it matters to you, then it is definitely achievable and we can help. If you, or your clients, don’t really value the label ‘independent’, or are unsure, I would suggest removing the word from your business name and marketing literature, as you can still continue to give ‘independent’ advice post 2013 but are under no obligation to do so.
Guidance Consultation 12/03 Paragraph 6.8
‘More than one adviser may be involved in developing personal recommendations for a client. An adviser may, for example, wish to consult an experienced colleague on a particular subject before delivering personal recommendations. Similarly, a number of people could be involved in product research and investment monitoring. However, we do not expect, for example, that a firm could meet the independent advice rules if a retail client was given multiple personal recommendations on retail investment products from more than one adviser within the firm (unless that advice related to the specialist activities identified above, i.e. pension transfers, pension opt-outs or long-term care insurance contracts). The adviser who delivers the personal recommendation should have the skills and knowledge necessary to ensure that the advice meets the standard for independent advice.’
Therefore, the adviser who delivers the personal recommendation must have sufficient competence to ensure the advice meets the independence requirements. The FSA also warns against independent firms making multiple recommendations from more than one adviser which would appear to preclude the option of making a referral to a specialist adviser within the firm. This is a complex area which we will be investigating in more depth as there are a number of issues we have already identified with implementing this.