When you work with an Independent Financial Adviser (IFA), you have a reasonable expectation that the advice you receive will be, well, independent.
Since 31st December 2012, the definition of independent financial advice has been stricter than it was under the previous regulatory regime.
In providing independent advice, a firm should not be restricted by product provider, and should also be able to objectively consider all types of retail investment products which are capable of meeting the investment needs and objectives of a retail client.
This new standard for independent financial advice is designed to ensure that advice is genuinely free from bias towards particular solutions or any restrictions that would limit the range of solutions that firms can recommend to their clients.
The Retail Distribution Review (RDR) also removed commission on investment recommendations, taking away this potential for remuneration to distort advice.
What this clear standard for independent financial advice does not cover is the tricky area of ‘inducements’; the things that often take place which can sway adviser decisions to recommend one provider instead of another, or take a particular course of action.
The Financial Conduct Authority (FCA) has published its final guidance on inducements and conflicts of interest. It makes interesting reading.
The FCA recognised that inducements can undermine the objectives of the new regulations. They have concerns about both potential and actual conflicts.
Within the final guidance, the FCA highlighted concerns about exclusive distribution agreements and described several examples of poor practice, including long term multi-year agreements between providers and adviser firms.
Also within the guidance is a death knell for product providers funding any part of overseas conferences for advisers, something we have always considered to be highly suspicious and unnecessary.
On hospitality and gifts, the final guidance allows providers to offer these as long as they are of ‘a reasonable value’, and as long as the hospitality or gift enhances the quality of the service provided to the client.
Hospitality should be UK based, must not incentivise poor behaviours (such as the volume of business generated by the adviser for the provider) and must be an event designed for business purposes.
They are also clear that promotional prizes or gifts offered by providers to advisers must not be extravagant or designed to incentivise poor behaviours.
Providers and adviser have three months from today to review their existing agreements and revise them in light of the new guidance, if necessary.
It will be interesting to see what impact, if any, this new guidance has on the behaviour of some providers and advisers, particularly large IFA networks and national IFA firms who seem to engage in some of the activities described to a much greater extent than smaller firms.
Investors should be aware of any inducements or conflicts of interest that might compromise the independence or impartiality of their adviser; independent should mean independent, as far as we are concerned.
