This article is part of Morningstar’s special series about the Retail Distribution Review (RDR).
The nomenclature of the government’s Retail Distribution Review (RDR) has triggered much debate. Financial advisers are being categorised as either “independent” or “restricted” according to the new RDR rules. To be ‘independent’ is widely interpreted as a ‘good’ thing—both in the world of financial advice and outside this realm. This implies that the alternative, to be a ‘restricted’ financial adviser, might entail some sort of drawback. But that’s not necessarily the case.
Independent
An independent financial adviser (IFA) must consider all the options open to their clients—all the products offered by all the investment providers. This part of RDR is designed to ensure that individuals receive advice that is 100% unbiased and wholly in their best interests.
Anastasia Georgiou, manager of Morningstar’s Adviser Workstation software, says that most of the advisers she works with are planning on remaining independent.
But does independent always mean independent? This is where it can get a little confusing.
Does independent always mean independent?
If a financial adviser finds that a certain group of clients has specific investment needs and objectives that would be met by a relevant portion of the overall market, such as ethical investments, they can focus on this area alone and still call their advice ‘independent’ within that particular market, as long as they consider all ethical investment products and all ethical investment providers. However, the firm cannot hold itself out as an “independent financial advice” (IFA) firm, because this would imply that it advises on more than just ethical investment options.
What is deemed a relevant portion of the market is set by the client and not by the adviser. If a client indicates that they are only interested in ethical and socially-responsible investments, it is clear that there is a range of products that would never be suitable for them, namely non-ethical investments. This means that the adviser would not need to consider these products when forming independent advice for the client.
To be clear, a hypothetical advisory firm could describe itself as “Greenfield – providing independent advice on ethical products” but cannot call itself "Greenfield Independent Financial Advisers."
Furthermore, many advisers use platforms to manage their clients’ assets, but not all investments are necessarily available via each platform. In such cases, an IFA must still consider any type of investment but that doesn’t mean that they can’t continue to use a platform for the majority of their clients, if suitable. It does mean, however, that an IFA who receives a client for whom a particular investment may be deemed to be appropriate but this investment is unavailable on their usual platform, then they must review this investment or refuse to take on the client.
Restricted
An adviser who considers all investment products from all providers with the exception of one type of product (for example they may exclude religious investments such as Christian or Islamic funds) are being labelled 'restricted' since they’re not offering ‘whole-of-market’ advice. At the other end of the spectrum, an adviser who considers only Christian and Islamic funds will also be a known as a restricted adviser. Similarly, if an adviser only considers products from a select group of providers, such as funds from Fidelity, M&G and Standard Life, for example, then they must also be known as offering restricted advice.
So is ‘restricted’ advice a negative thing? It’s clear to see that there may be situations in which restricted financial advice might better suit your needs. An individual determined to invest within a strict set of morals may prefer to go to an expert in that field. Why turn to someone whose knowledge is spread across the entire market when you only want advice on one area?
“There are varying levels of restricted advice,” says Georgiou, “restricted could mean that you never look at Structured Products as an option but are happy to look at everything else; but it could also mean that you only look at products from a small range of fund management houses.” There’s a big difference there and while the independent label is relatively clear, Georgiou believes the restricted label is less so. “Restricted is not ‘bad’ but investors need to know how the adviser is restricted and decide from there if they are happy with those restrictions.”
Despite some confusion—and debate—over the nuances of ‘independent’ versus ‘restricted’ and what this means for end investors, the advice industry has largely welcomed a move to more transparent advice and a clearer fee structure.
“Most of the advisers we work with are happy that the industry is becoming more transparent,” says Georgiou.
