OpinionJan 11 2016

Two-tier advice system heading our way

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Are IFAs expected to continue in splendid isolation with a rigorously policed market, while other distribution channels get a new lease of life? This might be where we end up, given policymakers’ current direction of travel.

For now, though, life in the market continues as normal, with the Financial Conduct Authority registering its usual sprawling range of concerns. Towards the end of 2015, we saw another spate of regulatory pronouncements that have implications for investment advisers.

Firstly, a report on the suitability of investment portfolios highlighted, among other things, the fact that many wealth manager solutions were not appropriate for clients, with a particular concern around capacity for loss. This report was aimed at that nebulous category of firm, the ‘wealth manager’, and may therefore only catch a particular segment of advisers along with private banks. I’d venture the firm singled out for running a really high portfolio turnover while generating an income from the trades must be from this latter category.

Investment advisers may have various misgivings about restricted advisers, vertically integrated firms or execution-only brokers pushing at the boundary of advice and guidance John Lappin

Yet if the Financial Advice Market Review results in the reintroduction of advice for lower-value clients, what implications does that have for the FCA and suitability? Will the regulator maintain its line? Or, to ask a more heretical question, should it?

There will be representatives of the bigger financial firms, who have the ear of policymakers, arguing that investing in a reasonable portfolio is, in most cases, much better than not investing at all. They may say the same goes for drawdown, as in ‘better a reasonable portfolio recommended with some advice than a do-it-yourself effort’.

Therefore, one might be drawn to ask: do we need qualified suitability? It’s not a question you are likely to hear uttered in the bar at the Institute of Financial Planning conference, yet something along these lines is probably not unheard of in Whitehall these days.

Investment advisers may have various misgivings about restricted advisers, vertically integrated firms or execution-only brokers pushing at the boundary of advice and guidance. They may have to brace themselves for an even more confusing landscape in future.

If there is a safe habour, what sort of distributor will seek to build an offering on this basis? We are already seeing the return of high street banks, who are dusting down their plans to re-enter the advice market. Perhaps we will see a re-energised direct sales sector with a little help from those robots.

But will any such channels face rigorous assessments of suitability from the FCA? Indeed, will they or should they be held to a lower standard?

One can see how a lot of advisers might not be happy with such a situation. Yet it may be the reality if regulations are subject to a radical redesign. It should prove to be an interesting year. Advisers may hope it is not too interesting.

John Lappin writes on industry issues at www.themoneydebate.co.uk