Independent in name only

Published on Saturday 5 January 2008 15:18

IF USING the services of a financial adviser you will want to be sure that the adviser has no incentive other than acting solely in your best interests. You will also want to know that where the adviser's advice leads to the sale of a product, the product recommended is the most suitable for your requirements. Unfortunately, this is not always the case.

As a result, the Financial Services Authority (FSA), the industry regulator, is undertaking a review of the financial advisory industry, focusing on the problems associated with the selling of financial products. This review is wide-ranging and covers areas such as how customers pay for advice, the qualifications of financial advisers and the financial strength of advisory companies.

One subject being heavily debated is the use of the word "independent". At present, financial advisers who are able to select products from all providers can call themselves independent. However, the current review is questioning the use of this term, and with good reason. While it is eminently sensible that independent advisers should be able to recommend products from the whole of the market, there are still serious question marks over whether many independent financial advisers are actually that independent.

A major reason is that most IFAs are remunerated by commissions. This means they have to sell a product to get paid, and the type of product they recommend and the provider they select determines how much they are paid. Therefore there can be a conflict of interest between what is best for the client and what is best for the adviser.

Product providers use the leverage of higher commission rates and additional financial support, such as toward marketing costs, company events, conferences, training and corporate hospitality, to try to influence their channels of distribution and persuade advisers to recommend their products.

This problem has been highlighted by Sir Callum McCarthy, chairman of the FSA, who said: "I am struck by the prevalence of examples of providers managing demand – up or down – by adjusting commissions, which can lead to less suitable or even unsuitable sales."

Many of the larger financial adviser firms are now owned, partly or wholly, by product providers. The financial advisers may argue that they act independently of the providers, but how can their ownership fail to have some impact on the advice given? These firms represent hundreds of millions of pounds of turnover every year.

Some financial advisers give the pretence of independence. The Tenet Group, for example, claims to be "the largest independently owned IFA group in the UK", yet is predominantly owned by providers including Friends Provident, Norwich Union, Aegon and Standard Life.

The product providers claim they have acquired stakes in financial advisory companies because these companies have the potential to be successful businesses. In many cases this argument does not stand up to scrutiny. Many large financial advisory companies are losing money and they do not have an appropriate business model to survive in the longer term, unless they continually receive financial support from their product-provider owners.

The reality is likely to be that product providers have acquired stakes in financial advisory companies because they believe it will help them exert more control over product distribution, ie the financial adviser will sell their products. This does not sound like independent advice.

Some financial advisers have decided to shed their independent tag altogether and have adopted a multi-tie approach. This means they are only able to recommend products from a limited number of providers.

We are not aware of any multi-tied adviser, owned in part or whole by a product provider, which does not have that particular provider as part of its multi-tie panel.

A financial advisory company deciding to adopt a multi-tie approach, and thereby limiting the range of products they can recommend, is unlikely to be doing so in the interests of their clients. Taking this stance can only be in the interests of the adviser, who is able to negotiate higher commissions and additional support from the product provider, and the provider, who is able to exert more control over their channels of distribution. The client is essentially the outsider in this relationship.

To give truly independent advice, an advisory firm must not accept commissions or additional support from product providers and must not be significantly owned by providers. However, most adviser firms are still predominantly remunerated by commissions, accept additional support which can total many hundreds of thousands of pounds per year.

With the likes of Standard Life, Aegon and Friends Provident taking stakes in advisory companies, financial advisory clients are likely to suffer from more product provider influence and receive less genuinely independent advice.

Andrew Fisher is chief executive of wealth advisers Towry Law