4th January 2013
The biggest change comes on the charging front. Advisers will no longer be paid commission on new recommendations of pensions and investments. But the less noticeable but nonetheless highly significant change is the creation of a new category of ‘restricted adviser’. We noted this under R in Mindful Money’s list of things for investors to watch out for 2013.
The new rules state that to retain their independent status and call themselves IFAs, advisers must demonstrate they have completed a comprehensive and fair analysis of the relevant market. The relevant market in this case is not just mutual funds, but structured investment products, investment trusts and other packaged investments such as exchange traded funds.
The adviser won’t have to recommend all these products – some advisers don’t like offering structured products at all, for example, and certainly not as a replacement for a diversified portfolio – but they have to show they have considered the products and discounted them as unsuitable.
At Mindful Money, we think that many IFAs will adapt to the new regulations and continue to be independent. However some advisers say meeting this requirement will cost a lot of money. They are therefore switching to be restricted advisers. They do not have to search all the relevant markets (but they must meet other requirements of the new reforms i.e. they can’t be paid commission, they have to meet new qualification benchmark and cannot sell a product that is unsuitable simply because it is more suitable than the other products in their more limited range.
So should you be worried about your adviser going restricted? Well not necessarily. First your adviser may have changed status, but may also be offering you the same breadth of recommendations as they did previously. They may claim with some justification that expanding their research to meet the new independence requirements will mean having to charge more.
In addition some bigger advice firms including many that fall into the wealth management or private client category may prefer to restrict the number of funds and portfolios recommended or may have existing commercial arrangements that they would have to tear up to meet the new rules.They may also argue that they offer a significant range of assets and investment instruments but that by restricting they can maximise the due diligence they do.
Finally some firms were already ‘tied’ or in the industry jargon ‘multi-tied’ to a few insurance companies or fund firms. Once again for them ‘restricted’ is, by and large, simply a new way of describing their existing arrangements and partnerships. If you were happy with this in the past (provided you were aware of it) then perhaps there is little reason to be concerned in the future.
However Mindful Money sees a couple of big weaknesses in the regulations. First there is nothing to really distinguish a firm that restricts to very few companies and funds and one that is connected to wide a range of providers.
That is certainly a flaw because we think it is pretty unlikely that an adviser with very limited arrangements can really find you the best solution.
Second, we don’t think the disclosure arrangements are really adequate. Advisers are meant to orally disclose their restricted adviser status, but there has already been a bit of kerfuffle in the adviser trade press – see this story on IFAonline – about how bigger firms are describing their arrangements. We are sure many firms really are just catching up with the new regulatory situation rather than engaging in any sleight of hand.
But we think it would be a lot better if the financial watchdog, the Financial Services Authority, had told firms to disclose their restricted status on their websites and communications. We also think very limited restricted arrangements should perhaps be disclosed in a different way.
One thing that you should remember – you can always ask your adviser what their status means and, in particular, if they can assure you that all your investment and pension needs can be met with the choice of companies and funds they are offering and have links with.
For example, there are many good investment reasons to include simple ETFs and investment trusts in a portfolio. They may not be right for you but may wish to ask. You might also want to ensure that you can access a reasonable spread of different types of assets i.e. bonds, shares, property etc that give all the usual benefits of diversification. That doesn’t mean necessarily offering direct access, but it probably should mean offering access to different funds or to a multi-manager or multi-asset manager who can.
As we noted earlier, the restricted adviser rules say an adviser should not recommend something that is not suitable for you.
In the financial watchdog’s own words –
“Where a firm providing restricted advice chooses to limit their product range to certain range of investments or providers, there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable”
That is quite a powerful protection. But it doesn’t mean that you shouldn’t ask a lot of questions yourself to make sure you are not being offered too limited a service.