Independent, restricted or simplified: what type of financial advice are you getting?

11th July 2014

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Most people will need financial advice at some point in their lives but not all ‘advice’ is created equal and consumers need to make sure they know exactly what they’re getting for their money.

 

A widespread shake up of financial advice last year through the implementation of the ‘retail distribution review’ (RDR) – a new set of rules governing advisers – bought in stricter requirements around qualifications and more transparency in the way consumers are charged.

 

The RDR also brought with it new rules around what advisers can call themselves depending on the type of advice they give. The Financial Conduct Authority (FCA), which regulates advisers, has updated its guidance around the types of advice offered, here’s a guide on the types of advice on offer:

 

Independent advice

 

Independent financial advisers (IFAs) can only call themselves this if they are not only looking at all your financial needs, including debt and insurance, but they are selling you products – whether it is a pension, investment or life insurance policy – that are the most suitable in the entire market.

 

This means they cannot just give advice on one part of your finances, say your pension, and they cannot sell you a product without looking at whether it is the best for you from all the products available.

 

These advisers will draw a financial plan for you and often call themselves financial planners instead of advisers. They will also have to offer you an on-going service where your finances are reviewed periodically. Depending on how much you pay the adviser they may review your finances every quarter or annually, or give you unlimited access to them.

Restricted advice

 

Restricted advisers have to meet the same qualification standards and use the same transparent charging models as independent advisers but the advice they can give you differs.

 

It will normally be ‘restricted’ in one of two ways.

 

Some may only be able to offer specialist advice on one particular area but able to sell you a product from the entire market. While this may be fine for those who have a specific area of their finances they wish to sort out, it will not take into account your wider financial needs.

 

Other restricted advisers may be able to advise you on all aspect of your finances but only offer you products from a certain company or panel of companies. The product offered will be the most suitable from that panel or company but it may not be the best product on the market.

 

Simplified advice

 

The rules around simplified advice are what have been clarified this week by the regulator. This type of advice can be delivered online, over the phone or face-to-face but the majority is expected to be provided online via decision tress and questionnaires.

 

By it’s nature simplified advice is restricted because it can only offer a certain number of outcomes for consumers, for example if you are using a decision tree the questions will lead you to an outcome or a type of product that is personalised to your answers but not tailored to you specifically.

 

The regulator refers to simplified advice as an ‘automated advice process’ and expects those who can’t pay or don’t want to pay for full independent or restricted advice to use this new channel.

 

If you are happy making decisions about your money such as the type of investments you want to make and how much risk you want to take, then simplified advice may be the right path for you.

Execution-only

 

There is no type of advice available through execution-only. This title is usually reserved for platforms and brokers who will facilitate your investment for a nominal charge but not give any opinion on whether they think it is a sensible idea or fits with your risk profile.

 

If you know exactly where you want your money to be invested and are happy to keep an eye on that money then you probably need an execution-only platform or broker that will provide you with the means to invest.

 

Guidance guarantee

 

The ‘guidance guarantee’ set out by chancellor George Osborne in the Budget is not actually advice in the regulated sense of the word.

 

Guidance will be offered to those retiring to provide them with information about how to turn their pension into a retirement income. The guidance guarantee was brought in to help people navigate the pensions landscape following the wide-reaching changes to the pension drawdown and small pension pot rules that means everyone can access their entire pension pot without needing to purchase an annuity.

 

Although the pensions industry has been given responsibility for paying for the guidance, they are unlikely to provide it (although the details are currently being ironed out). The guidance – which will be offered from April 2015 – is likely to be provided by a third party; those in the running at the moment include The Pensions Advisory Service, Money Advice Service and Citizens’ Advice Bureau.

 

Although the guidance is free to consumers, ultimately the cost incurred by providers will be passed down through the products so retirees should make sure they take the guidance as they will have already paid for it.

 

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