What advice options can I choose from?
The FCA have outlined a new advice landscape:
- Independent advice (unbiased and unrestricted advice).
- Restricted advice, (all forms of advice which do not satisfy the “independence test”).
- Basic advice based on simple “stakeholder type” products.
- Non–advised services (including execution only).
So how will I describe my services?
The FCA has redefined the distribution marketplace according to how advice is given – not by a category of adviser, such as Independent, Direct Sales, Tied or Multi–Tied. This means there will be advisers who may provide independent advice and those which provide restricted advice. If restricted advice is offered, the adviser must explain to the customer the nature of the restriction. The advice offered may be restricted by offering a product from a limited range, e.g. only packaged personal pensions, or by the areas of advice which will not be considered, eg pension transfers.
What is the difference between independent and restricted advice?
The FCA has stated that to give independent advice advisers will need to evidence they provide:
The responsibility falls on advisory firms to ensure that they meet both the criteria and conditions attached to independent status. The term “unbiased” suggests that advisers should not be subject to any form of influence (financial or otherwise) which may affect the selection of a product. The term “unrestricted” means that advisers must consider the suitability of all retail products which may be suitable in meeting a client’s needs. A new handbook definition of retail investment products will reflect the wider range of products that would need to be considered within a “relevant market”. The exemption that currently exists for group personal pensions business will still remain. This will continue to allow an adviser, who is advising a client on the merits of joining a group pension scheme to which their employer contributes, to describe their advice as independent even though they would not be actively analysing the suitability of all other retail investment products.
This will include all forms of advice which do not satisfy the “independence test”.
This will apply when addressing a limited range of needs perhaps using a simplified advice process or where customers’ needs are met through a limited range of products. Before providing this service the regulations require advisers to declare the limitation of advice (both orally and in writing).
Independent Advice Only
- Customers are likely to still perceive independence as the highest standard of advice and potentially most valued.
- Training & Competence scheme (T&C) offered by firms providing independent advice may be attractive to new advisers.
- New advisers may be attracted by the prospect of being able to offer independent advice to their clients.
- If independent advice is already provided, customers may not want to pay for something they believe they are already receiving.
- The range of product research would need to be wider, creating cost and time implications.
- In general, clients, regardless of complexity of need, will cost the same amount to manage given additional research requirements.
- Ongoing adviser competence and testing is likely to incur increased T&C costs and potentially take up valuable advice time.
- It may be more difficult to recruit advisers with the necessary market wide knowledge.
- Possibly more ongoing T&C will be required to keep pace with new product developments.
- Because of the new definition of independent advice, research costs may potentially be higher – possibly leading to higher charges for clients.
Restricted Advice Only
- Ongoing costs may fall as research costs may be lower than present.
- If advice is currently “tied”, restricted advice may be entirely acceptable to some clients.
- Potentially lower research costs.
- It may be possible to charge less and allow firms to compete on the price of advice.
- Clients may be happy with a limited range of investment products offered, provided the depth of advice is unrestricted.
- Recruitment of advisers may be easier.
- T&C requirements are likely to be less than under independent advice.
- Clients may see restricted advice as a “step down” from independent advice.
- Retaining clients may be a challenge if they believe they require independent advice.
- Will the cost of providing a restricted advice service be more difficult to justify?
- Possible customer confusion.
- Reverting back to independent advice in the future may be a challenge.
- Advisers looking to offer independent advice may not be attracted to firms which only offer a restricted advice service.
Combined Advice — Independent and Restricted Advice
- Clients may be offered both levels of service to meet different needs.
- Clients have greater control over the level of service they wish to receive, possibly leading to longer term relationships.
- T&C may be attractive to future advisers.
- Advisers may initially want to offer clients a restricted advice service and progress to independent service at a later stage.
- It may be relatively simple to develop a menu of services using both models which are priced accordingly.
- A firm cannot call itself independent in communications to clients, eg stationery, web pages, if it also offers a restricted advice service.
- A combined approach may be confusing for clients and lead to misunderstandings over the depth and breadth of advice given.
- Maintaining advice MI for the regulator is likely to be more complex.
- Market–wide research capability will still be required to support an independent service.
- Ongoing adviser competence and testing may incur additional T&C costs for all advisers, regardless of the frequency of independent advice given.
- Advisers may choose only to work for a firm which solely offers independent advice.
- More T&C is likely to be required if independent advice is offered. Combined Advice – independent and restricted advice