Advice labels of the future

According to Keith Richards, chief executive of the Personal Finance Society (PFS), the advice industry seems to be heading towards a primarily restricted model.

He explains: “It is currently creeping towards restricted, driven by a number of factors, including consolidation and vertical integration model evolution.”

But how many advisers in the UK are restricted and how many are operating a fully whole-of-market, independent proposition?

I do not think consumers care about the label ‘restricted’ and consequently this has no bearing on what they are prepared to pay for advice Tim Sargisson

Mr Richards says: “The exact split between independent and restricted advisers is currently not captured but assumed to be 50/50 and moving increasingly towards a restricted population.”

He is right to say the data is not captured - the Financial Conduct Authority, in response to FTAdviser, said it does not collect data on the restricted or independent status of advisers.

Nor does the Association of Professional Financial Advisers break down its membership by restricted or independent.

Chris Hannant, director general of the advisory trade body, comments: “We don’t collect that data but I would expect it to reflect the adviser population in general. There has been an increase in the number of restricted firms.”

Networks and support services organisations have mostly determined their propositions. For example, Sandringham Financial Partners is 100 per cent restricted.

Openwork operates a restricted distribution network and St James’s Place also has a restricted offering.

The majority of firms which have service contracts with support services provider Bankhall are independent advisory firms.

Fellow support services provider SimplyBiz does not make it mandatory for members to state what proposition they offer.

However, based on the figures of usage of members who use SimplyBiz’s restricted compliance document hub and its independent compliance hub, it appears to cater to approximately 6 per cent restricted advisers and 94 per cent independent.

Gill Davidson, group regulatory director for Tenet, says: “The majority of our membership is independent or operating a hybrid of independent and restricted advice, depending on its customer segmentation model.”

Client concern

Do clients understand the difference between the various designations?

Not according to Mr Richards. He says: “The current labels offer little consumer value and it has become questionable as to whether the advice labels should remain, as they continue to confuse the public and create unhealthy division among the profession.”

In fact, Mr Hannant believes the use of labels only makes it more difficult for consumers to understand what sort of advice they’re getting.

He says: “I’m not sure labels help. The important thing is whether the client understands the actual service they are getting, and on what terms, which boils down to a more nuanced description than ‘restricted’. This involves more than just a label.”

But even if the industry thinks advice labels do not matter to clients, the FCA’s Factsheet No.009 states an adviser must disclose to the client exactly what advice service they are getting.

The document says:

■ All firms providing advice should disclose to each client, what type of advice they will receive: independent or restricted advice. This is so consumers know upfront what type of advice your firm offers.

■ Firms who offer restricted advice are required to provide oral disclosure, to enable consumers to understand the nature of the service.

■ Advisers offering restricted advice will be required to disclose the fact they provide restricted advice and the nature of that restriction.

Tenet’s Ms Davidson comments: “Our advisers explain the scope of their advice to clients and would not rely solely on a regulatory label.”

Price premium

There is an argument the designation could subconsciously dictate the level of fees a client is willing to pay. Would they be prepared to pay the same for restricted as for whole-of-market advice?

Mr Richards thinks so. He says: “What I see is most consumers do not understand the difference and therefore have no price or value perception differential.

“There will always be exceptions but some restricted models may warrant and justify a higher service fee.”

Ms Davidson agrees: “In today’s market, there is no real evidence of a price differential between independent or restricted advice.”

“I do not think consumers care about the label ‘restricted’ and consequently this has no bearing on what they are prepared to pay for advice”, says Tim Sargisson, chief executive of Sandringham Financial Partners.

He adds: “As long as the adviser explains clearly what it is they do, the client will be more interested in a person who is suitably qualified and trustworthy.”

In terms of the sources of income for advisers, advice given on a restricted basis still makes up a relatively small percentage of the total.

Data from Apfa’s latest Financial Adviser Market: In Numbers report shows the lion’s share of adviser income - 79 per cent - is from independent advice.

Source: Apfa

But this might change. Tim Sargisson, chief executive of Sandringham Financial Partners, comments: “Compliance costs and the regulatory burden could be the tipping point and this has certainly been the rationale used by some advisory bosses justifying their decision to join restricted networks.

“There will always be a group of high quality, independent advisers running profitable businesses. But consolidation - and with it the promise of greater numbers of restricted advisers - will surely come.”

Communication and suitability

There can still be negative connotations associated with the word ‘restricted’, however, as Richard Nuttall, head of compliance policy and Liz Coyle, compliance policy manager for SimplyBiz Group, warn.

Mr Nuttall explains: “The standard definition means limited or constrained, which in turn means imperfect or incomplete. The reality is there are a number of types of ‘restriction’.

“For example, a firm may be independent within a restricted area, such as pensions or retirement planning.”

Therefore, according to him, no matter what the label or where a final definition of advice ends up, it is all about communication and disclosure.

He adds: “Much was said before the implementation of the Retail Distribution Review about firms moving toward a ‘restricted’ model.

“Being restricted is not necessarily ‘bad’ as long as the context is clear within the disclosure documentation. The appropriateness and suitability of the advice is the most important issue for consumers.”