The purpose of the Retail Distribution Review (RDR) by the Financial Services Board (FSB) suggests that a financial services customer should always be in a position to clearly understand what services are being provided by an intermediary and in what capacity the intermediary is acting.
The above statement is particularly important when looking at the concept of financial advice, as customers should be able to evaluate the type and extent of the advice they are receiving before deciding on whether to act on the advice.
A financial services customer should be placed in a position to understand, just how connected the intermediary is to the product supplier to enable him or her to ascertain whether he or she can expect a degree of independence from the adviser.
It’s all in the title
The RDR provides for three types of advisers. These advisers are classified in accordance with their varying degrees of independence, as follows:
• Independent Financial Adviser (IFA);
• Multi-tied Adviser; or
• Tied Financial Adviser.
The RDR provides that any person who wishes to provide financial advice to financial customers may only do so in one of the above capacities. This classification in my view will assist the financial customer in ascertaining the level of independence he or she can expect from the adviser.
Are IFAs an endangered species?
To answer this question, we need to look at some of the key features of IFAs as proposed in the RDR.
IFAs will be required to offer advice on a multiplicity of products which are offered by a number of product suppliers. To meet this standard, IFA’s advice will need to go beyond the mere making of recommendations on a restricted set of products or product suppliers. The Regulator is aware that expecting IFAs to advise on the “whole of the market” will probably not always be practical or feasible if IFAs are also expected to be able to demonstrate high standards of product specific knowledge across all products. The Regulator has accordingly asked for input surrounding this criterion, but it is clear that it wants the IFA to be skilled and able to give the financial customer options.
IFAs will also be required to not be too closely related to product suppliers. The Regulator has indicated that an adviser will not be permitted to call him/herself an IFA if there are various types of connections or relationships between the product supplier and the adviser, as this will ultimately affect the adviser’s ability to remain independent.
Down to the nitty gritty
Therefore, the IFA will need to offer a wide variety of products from a variety of product suppliers and he or she will need to demonstrate real and complete independence, which can be rather strict criteria.
We may well find that the above criteria will significantly limit the amount of advisers that can legitimately call themselves IFAs. However, the IFAs who do qualify, should go a long way to instil confidence in financial consumers that they are dealing with advisers that do not have conflicts of interest, have their best interests at heart and ultimately treat them fairly. If IFAs do instil this type of confidence, then the RDR’s objectives will be met in the IFA space. If the RDR’s objectives are met in this space, I suspect that financial consumers will benefit from the value that an IFA adds and will be willing to pay for this benefit. If this is the case then the RDR will not lead to the extinction of IFAs as a species.
We are for the “independent”!
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