Objective Product Recommendation and Advice

The FSB is still grappling to find an equitable solution to the ideal adviser categorisation model.

It seems to have moved away from the original thinking which provided for three categories. In particular, industry input caused serious reflection on the so-called “multi-tied” tier. The envisaged range of product or product supplier choice offered was just too wide, and the public would have great difficulty in understanding the concept.

The latest thinking is that there will only be two categories – a “registered product supplier agent” or a “registered financial adviser”. Where “tied” advisers are restricted in terms the products offered by their employers, alternatives may be included, but to a limited degree.

It seems then that the major distinguishing factor between the two categories will be the level of product supplier influence.

Ironically, the Phase 1 RDR Status update notes:

Although it is clear from comments received that some advisers attach importance to the ability to describe themselves as “independent”, it is less clear that this attribute is highly valued by customers. Instead, some insights suggest that customers place more value on the level of competence (including qualifications) and expertise of advisers, and their ability to assist the customer in making difficult financial decisions, than their status as “tied”, “independent”, “restricted” or similar labels.

Whilst this may be true, there is of course always a restriction on tied agents in terms of product choice. No one product provider offers the best products across the entire range of investments, life cover, insurance or healthcare. It is the adviser’s legal obligation to ensure that, through a thorough evaluation of the client’s needs and means, the best product is recommended. What now, if you have only one option at your disposal, and you know that there is something better suited to the identified needs available on the market?

The original Retail Distribution Review contained a list of eight potential situations where product providers could exert pressure on advisers to recommend products which may not be the correct one for a specific client.

“…an adviser may not be described as an IFA, independent insurance broker or independent health benefit broker if any of the (eight) situations, or any combination of these situations, apply to the relationship between the adviser and any product supplier…”

This was again referred to at the FSB FAIS Conference held in March 2016.

The main test of independence appears to be the extent of product supplier influence. Whether a two- or three-tier category is adopted, concerns regarding conflicts arising from different levels of influence by different suppliers need to be resolved.

Further focus areas of potential conflict highlighted include:

  • Production or sales targets
  • Ownership or other interests
  • Binders and outsourcing agreements.

For the life of me I cannot see the tied side of the industry doing away with production targets. When sign-on bonuses were banished, provision was made for new entrants to be financed until they were up and running. Surely the employer is entitled to expect production related to the “financing” of such new advisers?

One has to bear in mind that product providers are in a very competitive environment, and have to find innovative ways in which to acquire new business.

I recently saw an offer from a prominent product provider to independent brokers to provide a range of services which will assist them in becoming more professional. It is not a freebie, either, and depending on the options selected, can add substantially to the cost of running a business.

What I am not too sure about, is how this will affect the “independent” status of the adviser, given that the jury is still out on the specifications of what constitutes, exactly, a “registered financial adviser”.

There can be little doubt that many current aids like prescribed needs analyses are mostly slanted towards outcomes that recommend specific products in the stable of the provider.

The question that remains unresolved is whether this is fair to the client. Whilst it helps the adviser in legally justifying the advice, the objectivity of the tool may be questionable.

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