Whether or not financial advisers can call themselves independent may in future be determined by how free they are from being influenced by product providers, rather than the number of products on which they can advise you.
Caroline da Silva, the deputy executive for financial advisory and intermediary services at the Financial Services Board (FSB), told an investment conference hosted by Morningstar recently that the FSB had revised its thinking about how to define an independent financial adviser since it published its Retail Distribution Review (RDR) document in November last year.
The RDR document contains 55 proposals that, if implemented, will result in far-reaching changes to how financial products are sold to you, with a view to ensuring that you are treated fairly and meet your financial goals.
Da Silva told the conference that feedback on the proposals was voluminous, but the proposals that attracted the most comments pertained to when an adviser or advisory business is entitled to call itself “independent” and the extent to which a product provider is responsible for an adviser’s advice about its products.
The proposal in the RDR document is that financial advisers and short-term insurance brokers will be designated as “tied” agents if they advise on products from a single financial institution; they will be “multi-tied” agents if they can sell the products of certain financial institutions only; and they will be independent if they can advise you on a range of products from different providers.
The document called for input on the number and range of products that should be used to distinguish a multi-tied agent from an independent adviser.
It also proposed that if a product provider influences an adviser in any way – through direct or indirect ownership of the advisory business, any form of employment, agency or representative contract, or any other mandated relationship – the adviser would not be able to call itself independent.
The RDR document suggested that advisers who are subject to any sales or production targets set by a product provider, or who in any other way are able to earn more remuneration from one provider than another, be prevented from calling themselves independent.
Da Silva told the conference that the FSB is close to dropping the requirement that independent advisers must be able to provide advice on products from a range of providers, but it wants to retain the proposal that the criterion for determining whether or not an adviser is independent is the influence a product supplier has on the adviser.
She said the FSB was still deliberating whether an independent adviser has to be free of the influence of a product provider and able to advise on the products of more than one provider.
Consumers are more concerned about how professional an adviser is than the range of products on which he or she can product advice, Da Silva said.
The RDR proposals suggest that independent financial advisers will be required to disclose to you the range of products and providers on which they can provide advice, as well as a breakdown of the products of each provider they recommended over a certain period, such as the past 12 months.
Da Silva said the FSB would also consider changing the proposed terminology to describe the extent of an adviser’s independence to make it sensible for you, the consumer.
The RDR proposals introduced the designation “financial planner”, which can be used by tied, multi-tied or independent advisers who can provide you with a comprehensive financial plan, she said.
David Kop, the head of advocacy and consumer affairs at the Financial Planning Institute (FPI), says the introduction of the “financial planner” label will solve one of the biggest problems that professional advisers represented by the FPI face, namely that the selling of financial products has been muddled with financial advice.
The “financial planner” designation would enable the service of providing advice to be valued, he said.