Take care in choosing advice models while confusion reigns
Conflicting views over independent and restricted advice are adding further confusion rather than creating the clarity IFAs are looking for.
The new rules will mean IFAs will have to consider a wider range of investments, which has led many to believe that maintaining an independent status is simply too onerous, adds little consumer value and will potentially increase both risk and operating costs.
These initial perceptions are misplaced and in our view the majority of IFAs can continue to operate an independent model without increasing cost, complexity or risk.
The views of many commentators in the market appear to be based upon their initial reading of PS10/6 rather than on specific detail and thorough investigation of practical implementation. At the outset, Tenet’s view was not dissimilar but when we focused on how to support independence under the new rules, it became less of a challenge than it first appeared, especially when compared with restricted whole of market and multi-tie models.
The general perception that choosing an independent advice route after the RDR will increase both cost and risk may also at first appear intuitive but we can find no meaningful evidence to support that notion.
On cost, many industry observers maintain that an independent model will be more expensive to operate and potentially increase future risk exposure. This is a logical assumption but not necessarily true. When you consider that restricted advice could encompass anything from WOM (packaged products and collective investments) and variations of multi-tie through to single-tie, that is a pretty broad and inaccurate statement.
Only single-tie or best-of-breed propositions offer genuine process savings and there are examples of these models in the market already, as indeed there are for multi-ties. It is unlikely that either representatives of WOM or multi-tie advice models will be cheaper to operate unless some form of financial incentive is being passed to the adviser via the restricted panel of providers/fund managers/platforms.
We also see no material service cost differential between supporting independent or restricted advice. Single-tie propositions may, of course, be very different in both risk and process and should not be compared with multi-tie restricted advice generally.
Regarding risk, because of what are believed to be more arduous requirements for independence, coupled with the potential exposure of including higher-risk investment solutions, there is again a general perception that a differential will exist regarding both PII premium and excess. Following our own investigations and discussions with PI insurers, we can find no evidence of this at present.
Although some advisers will choose restricted advice models for a number of different reasons, it is important others are not incorrectly influenced by the confusion that exists or by the particular preferences of an organisation forcing a view.
Keith Richards is distribution and development director at Tenet Group
12 Feb 2013
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