An article in one of our trade publications is today questioning the importance of the ‘independent’ title for financial advisers.
In his weekly column for Money Marketing, Nic Cicutti asks whether the IFA tag itself is something worth saving.
At the end of next year we see the introduction of a set of new regulations known as the Retail Distribution Review (RDR). Part of these new regulations sees changes to status rules for financial advisers.
From 31st December 2012, financial advisers will either be ‘independent’ or ‘restricted’.
The new definition of independent advice is advice that is “unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market”.
The FSA goes on to describe independent advice under the new rules by saying it is “designed to reflect the idea of a genuinely independent adviser being free from any restrictions that could impact on their ability to recommend whatever is best for the customer”.
Any financial advice that does not meet these new standards of independence will be ‘restricted’.
Here at Informed Choice, we believe that the value of the IFA title as it applies to product selection has reduced to some extent in recent years. It does however remain an important part of the overall proposition from leading financial advisers.
‘Independent’ financial advice in its current format does not go far enough to guarantee independence for the consumer.
In addition to independence of product selection, real independence should include independence from product provider ownership and independence from commission bias.
The Retail Distribution Review deals with that final point from 31st December, when commission is abolished and all financial advisers (independent or restricted) must operate on an ‘adviser charging’ basis, where charges for advice, implementation and reviews are explicitly agreed with the investor ahead of any work taking place.
Independence of ownership will remain a blurred issue following the end of this year. Whilst those IFA firms that have life assurance or investment company ownership need systems in place to ensure their impartiality, commercial influences are an inevitable fact of life.
In addition to ‘real’ independence, investors should be looking for other important qualities when selecting an Independent Financial Adviser.
Working with an IFA that is a firm of Chartered Financial Planners is important to ensure the business has satisfied rigorous criteria relating to professional qualifications and ethical good practice.
Working with an IFA that already operates on an adviser charging basis is essential to avoid the risk of commission bias when financial products are recommended.
We would also suggest that investors only work with firms where a team-based approach to the construction and delivery of advice is used, as this is the only way to ensure continuity and suitability.
A lot is changing in the world of financial advice this year.
Those advocating independent financial advice could become less vocal as we get closer to the new regulatory deadline of 31st December, as they accept a move to restricted advice to suit their own business requirements.
What does not change for investors after 31st December is the need to take care in their selection of a professional independent financial adviser who will work in their best interests, without commercial influences directing the suitability of advice.
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