Despite assurances to the contrary, the recommendations contained in the Retail Distribution Review (RDR) released by the Financial Services Board will make it more challenging for a financial adviser to operate as an independent. As the recommendations stand, many so-called independent practitioners may need to rebrand themselves as multi-tied advisers dealing with a limited number of product providers. While this could dramatically reduce the number of independent advisers, is independence really the gold standard in terms of good advice?

The Financial Services Board has assured the industry that it wishes to avoid the mistakes of the UK where the unintended consequence of regulation was the decimation of independent advisers. Yet one of the challenges with the RDR is that it has not answered key questions around what defines an independent adviser. It is not clear, for example, how many investment-product companies an independent adviser would have to deal with before being considered “independent” as opposed to multi-tied.

Most existing independent advisers deal with a range of investment funds but for administrative and cost efficiencies, they use a single investment platform or a LISP (linked investment service provider), or they have their own internal multi-manager funds. It is not clear at this stage whether the use of a single investment platform or an internal multi-manager fund would qualify as independence.

Independent adviser Gregg Sneddon says the way product providers currently issue contracts also makes it difficult to remain independent. The RDR states that an adviser cannot claim to be independent if it is directly or indirectly subject to production or sales targets in relation to the products. Yet, as Sneddon highlights, in order to sign a contract as an adviser one has to guarantee a certain level of business to the provider.

Earning of commission

The treatment of insurance commissions will also prejudice independent advisers who may not receive commission, whereas tied or multi-tied agents may. The RDR recommends that no adviser may charge commission on investments, yet commission as well as an advisory fee may be charged by tied or multi-tied advisers on insurance products. A tied or multi-tied agent may receive 50% of the commission upfront and the remainder on an ongoing basis. The commission will be imbedded in the premium but the advice fee will show as a separate debit order to the client. In the case of an independent adviser any fee would be seen as advice and charged separately.

Another recommendation that will affect many smaller advisory firms is around “hybrid” advice models and the proposal that an individual may no longer act as a representative on multiple licenses. In order to provide a full range of services to their clients, many smaller independent advisers use the expertise and financial service provider (FSP) licenses of other firms to offer products outside of their license categories. For example an investment firm would utilise the expertise and license of a firm authorised to sell medical schemes if their client required medical cover. Under the proposed recommendations the client would now have to contract directly with the other firm for these services.

Andrew Bradley, CEO of Old Mutual Wealth says that while these recommendations aim to avoid customer confusion it makes things difficult for smaller firms who would previously be able to have a key individual of theirs work under the supervision of another adviser firm until they had developed the skills and expertise to apply for their own license to be expanded with the additional categories. Bradley says it is also unclear if this recommendation would mean that advisers would have to go back to all their clients to change their mandates.

Perhaps, though, independence is all about semantics and as a client what really matter is the level of advice. Bradley argues that irrespective of whether the adviser is tied to one company or fully independent, what will differentiate their practices will be the service and advice they offer and the fee for that advice. If advice is indeed the true value proposition then the suggestions within the RDR for tied advisers to receive less remuneration could be prejudicial. The paper suggests that tied advisers would provide more limited financial planning yet Bradley argues that any adviser, whether tied, multi-tied or independent, should be able to charge the same advice fee for the same level of advice, experience and qualification.

Financial planning vs product advice

David Kop, CFP® and Head of Member and Corporate Relations at the Financial Planning Institute, agrees that the type of advice is more important than independence and that the difference between financial planning and financial product advice needs to be clarified. A financial planner would structure and arrange your financial resources to meet your life goals which would not necessarily result in the sale of a product, whereas financial product advice would be advice specifically around an immediate requirement.

There is no reason a tied or multi-tied adviser could not offer financial planning, as large firms such as Sanlam, Old Mutual or Liberty can offer a full range of investment products and access most asset managers through its investment platform. Kop says what is important is to understand whether that adviser has any undue influence (such as performance targets) to sell a specific product – this may apply to tied or multi-tied advisers.

Although National Treasury has stated that it does not intend to limit independent advisers to the extent of the UK model where only a handful of independent firms remain, many of the requirements remain onerous and it is possible that National Treasury would in fact welcome less independence in favour of greater accountability. The RDR calls for greater supervision by product houses over the advisers selling the products. It states that product suppliers must bear full responsibility for tied advisers while sharing responsibility for advice between itself and multi-tied agents. Yet responsibility over independent advisers is far less onerous and perhaps for this reason National Treasury would welcome a move to fewer independent advisers.

This article first appeared in City Press