What’s more important than Independence?

There’s been some bluster lately about the value, or otherwise, of being an Independent adviser, some quite pejorative.  Now it’s time for the fight back!!

I recently scanned the websites of the MatrixData Top 100 Financial Adviser firms.  It is often publicised as the Top 100 IFA firms.  It isn’t.  Not with Openwork in 2nd and St James Place at 4th.  I was stunned to note the column inches that firms devote to calling themselves Independent Financial Advisers and explaining why it’s important to their clients, when we are supposed to believe that neither advisers nor clients care one iota about it.

Independence is the only way you, the client, can get a truly objective view of your finances. Being independent demonstrates that the firm “fully understands their clients’ needs”.  It’s “altogether individual”. We create strategies tailored to client needs, using every possibility available. Independent in thought, in action, and independent of any product provider.  Because “all our advisers are independent … their advice is truly impartial.” One size doesn’t fit all. Clients are individuals.  The firm’s only allegiance is to the client, not to any product provider. IFAs only ever work in the client’s best interest.  Et cetera.

So here’s the rub.  When revising their websites over Christmas, how will they change their explanations about their impartiality, demonstrate their commitment to clients, prove their independence of thought and action?

If you decide to be Restricted advisers, like Openwork or St James Place, you must put in disclosure documents that you offer Restricted advice. You must say what those Restrictions are, whether by way of products or product providers. You must also give an oral disclosure, telling your clients you offer Restricted advice and stating the nature of the Restriction.

Not a conversation I would look forward to, I must say.

Because it means that you decided, sometime in 2012, that your clients, some of whom you haven’t met yet, some of whom will face dramatic changes in their life and finances, will never need advice on certain products or arrangements from certain providers.

Does Adviser Charging mean we are all now agents of the client, not agents of the product provider? No.

Adviser charging merely removes the potential for commission bias. If you are Restricted and selling the products of one firm, or a limited range of products and providers dictated by your network, or even a mythical “nearly Independent adviser”, you are not the agent of the client.  Quite simply, the client did not set the advice agenda. You did.

It’s simple to explain how Restricted advice is in the firm’s best interest (easier, cheaper, quicker, more profitable) and how clients probably won’t care anyway (which is such a flawed assertion I can’t begin to refute it – actually I can, but I’m out of words).

How can it be in a client’s best interest for advisers to have decided what solutions they will need, months or years before they walk through the door?

How can it be in the client’s best interest to provide less tailored, less bespoke, less individual, less impartial, less objective, not Independent, Restricted advice?

It can’t.   This isn’t about a “willingness to die on the altar of Independence”.  It’s about a commitment to put client best interests first, by delivering Independent advice.

Standing up for the Client’s Best Interests

It has long been the case that solicitors and accountants have only been able to refer their clients to Independent Financial Advisers if they require financial advice.

However, the assertion has been made that after 2013 the criteria for independence will be toughened, with advisers who wish to remain independent needing to advise on a wider scope of retail investments.

The latest hiatus in this debate has been caused by reports that FSA head of investment policy Peter Smith has told the professional bodies that “The definition of ‘independence’ you use for the purposes of your requirements does not necessarily need to be aligned with our use.”

There have been repeated allegations of solicitors referring clients to companies which are tied under the current rules, restricted advisers in the new regime. Solicitors commonly refer clients to stockbroking firms, not included in the current regime, but independent or restricted in the new regime according to how they structure their business propositions.

I suspect that this issue has arisen because of scaremongers asserting that independence will be a more difficult standard to achieve post 2013 and that as a consequence there will be only a handful of firms meeting this new standard.

The existing SRA rules make quite clear that “if a client is likely to need an endowment policy, or similar life insurance with an investment element, you must refer them only to an independent intermediary authorised to give investment advice”.

This would without any doubt whatsoever incorporate investment bonds, insured pension arrangements and unit linked whole of life policies commonly used in estate and inheritance tax planning.

This does however leave some gaps, particularly in relation to investments that do not fall within these terms, such as discretionary stockbroker portfolios, or uninsured pensions.

However, the over-riding rule, repeated on several occasions is that “When making or receiving referrals of clients to or from third parties you must do nothing which would compromise your independence or your ability to act and advise in the best interests of your clients.”

Similarly “If you recommend that a client use a particular firm, agency or business, you must do so in good faith, judging what is in the client’s best interests.”

Our starting point is that independent, unbiased, whole of market advice is in concept and in reality better for clients.

Independent financial advice is obviously in a client’s best interests, especially where a solicitor is not well placed to determine a client’s requirements according to the demanding suitability rules which apply to financial advice.

Referral to an independent financial adviser who has no links or ties or restrictions that would compromise the advice the client receives is quite clearly in the best interests of any client.

What is required is a passionate defence of independence PLUS sufficient IFAs in the marketplace to whom solicitors can actually refer business, not a watering down of what we mean by “a client’s best interests”.

History & Change

When I first came into financial services in 1987 I had no idea what the world before that looked like. It was all new to me, quite simply “just how things are”.

However, colleagues who had been in insurance and financial services were less comfortable. They faced the introduction of personal pensions and the extraordinary concept of contracting out of SERPS. Pension transfers and opt outs and the need to understand how these products interacted with retirement annuities were the training issues of the day.

In those days, when direct sales was more popular than it is today, companies had to understand the implications of tied advisers needing to disclose they only sold the products of their own company. You were not allowed to even pass comment on the products of any other provider, even if you happened to know something about them. And if it was not “best advice” to sell a product from your range you had to refer clients to an independent adviser with a larger range of products in the toolkit to suit them.

At that point there was no real definition of an independent adviser, although it came to be interpreted as “someone who is not tied to the products of their own company”.

But even then, the “i” word was valuable enough for direct sales people to use, usually in the context of having their own “independent” business rather than being employed by the product provider.

My “road to Damascus” moment was picking up a trade paper and reading about Standard Life’s 95% allocation pension product. I could see that this was a creative, fair and practical solution to high up front product charges – more expensive for those able to contribute continuously through to retirement, but better value for people with more customary interrupted work patterns.  And I could see why it could be a better product than the one I’d been selling.

More recently we had to understand the “multi-tie”, a creative way to enable companies to advise on products from a limited range of “best of breed” providers, accepting that the best term assurance provider might not be the best personal pension provider (although it wasn’t always clear if it was about best of breed product selection or choices based on commercial arrangements).

The latest change was to distinguish between whole of market or independent advisers. Until the end of 2012 being Independent is distinguished by offering clients a fee option to pay for their advice whilst whole of market advisers continue advising on a commission only basis.

And somewhere in the middle of all that the minimum benchmark qualification was introduced and “best advice” gave way to “suitable”.

I first became an IFA after a short period in direct sales because it was obvious that there were products and providers “out there”, like that Standard Life pension, or pretty much any investment fund, that were better than the ones in my armoury.

The following 12 years, 2 of which were at Fiona Price & Partners, and the next 10 running Professional Partnerships, my own business, saw me develop my thinking – on charging, on financial planning, on investments, on qualifications, on asset allocation, on outsourcing, on client propositions.

We have always worked within a world of constant change – whether it be regulation, products, markets, trading environment … and as I can testify, we often change with age, experience, understanding, clients and so on.

So the Retail Distribution Review train is approaching its final stop bringing yet more change.

All advisers will have to operate under adviser charging. Every adviser will have to agree services and costs with their clients. All advisers must obtain an appropriate Level 4 qualification, complete CPD and confirm adherence to a code of ethics.

And instead of the current confusion of tied, multi-tied, whole of market or independent we go back to a binary choice : Restricted or Independent.

I personally find this change, a return to this simple distinction, quite reassuring.

Either you have links, ties, special deals, favourable terms, contractual arrangements, or panels which prevent you being able to advise your clients on the full range of products and providers, or you don’t.

This has led to debates about the value, or otherwise, of being Independent. Some (often with vested interests) suggest it’s not important to advisers and it’s certainly not important to clients.  Yet, review the websites of a number of advisory firms and you will find a stunning amount of space devoted to explaining Independent Financial Advice and why it’s important to clients.

“Independence is the only way you, the client, can get a truly objective view of your finances.

Being independent demonstrates that we “fully understand our clients’ needs”.

“It’s ‘altogether individual’. We create strategies tailored to client needs, using every possibility available. Independent in thought, in action, and independent of any product provider.”

Because “all our advisers are independent … their advice is truly impartial.”

“One size doesn’t fit all. Clients are individuals.”

“The firm’s only allegiance is to the client, not to any product provider.”

“IFAs only ever work in the client’s best interest.”

When you put it that way, why on earth would a potential client aspire to anything else?

And if so much time is spent on the subject, how can we really believe that neither advisers nor clients care about it??

Some advisers point out that it’s been many years since they used IFA in their company name and literature, or described themselves as an IFA.

Wealth management or financial planning are in the ascendancy, but a quick search on Linked In brought up around 10,600 individuals who had IFA or something similar in their profiles – that’s a lot of people using a descriptor that apparently doesn’t matter anymore!!

Other advisers argue that where their focus is on holistic financial planning, lifestyle planning or life planning, the client proposition is about the planning service and not about whether product sales are made on an Independent or Restricted basis.

For an increasing number of firms, planning does indeed take priority. However, sooner or later the vast majority of clients need a product : an investment fund, a pension fund, an ISA … And whatever your view on the relative merits of planning or product you will have to decide to be Independent or Restricted (or maybe both).

One blogger said we “shouldn’t confuse Independent advice with quality advice”. I don’t. All advisers – whether independent or restricted – should offer “quality advice”.

Nor, incidentally, do I confuse regulatory status with qualifications and professional status. Every single one of us, whatever we do – adviser, paraplanner, administrator, product designer, broker consultant – should be a professional …

And still we come back to choosing Independence.  Or not.

I chose Independence, like many advisers did, because I knew I would be able to offer better advice to my clients.

Placing restrictions on the advice we can give, on the products or the providers we can recommend, without being able to predict what life’s changes will bring to a client’s financial future, or before we have even met a client for the first time, does not feel like a change for good.

Some say that Restricted is a negative word, but it does make clear that advice is offered which is constrained in some way.

Conversely, Independence is positive. The client’s needs come first. Each and every time. Without restriction, without limitation. Being Independent is valued by clients, and their advisers. In amongst all the changes we have had to deal with, this need never change.