Can an IFA be truly independent in a vertically integrated firm? This was the question posed at a recent Smith & Williamson roundtable discussion.
The answer from the panellists, many of whom were independent advisers themselves, was a resounding no.
“Rightly or wrongly you’ve got a parent company, an investment manager and an advice arm and potentially a platform in the middle, which you’re all trying to make profitable and the easiest thing to do is to get all the business to go through all three of them,” said Dave Field head of customer services at Novia Financial.
Ben Yearsley director of Shore Financial Planning agrees having a restricted advice arm is a more logical approach for a vertically integrated firm, which he notes has become a more common model.
“You have the adviser, you have the manufacturer, you even have the platform all in one business. There’s always going to be some conflict in that chain.”
That conflict can be avoided if advisers are restricted to selling products from other businesses within the parent company.
“At least everyone knows under that scenario what the deal is,” says Yearsley.
Restricted versus independent
This could explain why so few of the vertically integrated firms offer independent advice.
St James’s Place, which has one of the largest adviser networks in the UK, and Hargreaves Lansdown only offer restricted advice. SJP had 3,810 advisers or ‘partners’ as they are referred to in its corporate literature at the end of June 2018. Hargreaves has a much smaller pool of 90 restricted advisers.
An obvious anomaly to this model is Quilter-owned adviser network Intrinsic, which includes both independent and restricted advisers.
The advice firm, which has just been rebranded under the Quilter logo, had 3,700 advisers by H1 18, 43% of which are restricted. The remainder comprised independent advisers, as well as mortgage and protection specialists.
A spokesperson for Intrinsic said the firm believes in the “power of face to face in every form” and “understands the need for both restricted and independent advice”.
Passionately independent
The FCA has increasingly put pressure on advice firms to clearly identify to clients whether they can counsel clients across the full range of financial products and providers (independent) or are restricted in their advice. SJP advisers have previously run afoul of the UK consumer watchdog Which? by failing to correctly inform clients that they were not IFAs.
The Intrinsic spokesperson said the firm takes the regulator’s criteria “very seriously” and has processes and structures in place to ensure advisers adhere to it.
They said restricted advisers choose from a panel of products and providers that are pre-researched by Intrinsic and that clients are free to choose from “a wider solution base” if the restricted suite does not match their needs.
“The decision about which investment solutions are right for each individual client is with the adviser, where client suitability decisions will always remain sacrosanct. This is of vital importance for all our advisers – independent or restricted.”
Mike Barrett, consulting director at the Lang Cat, doesn’t believe that independent advisers and vertically integrated firms are mutually exclusive.
He says the independent advisers at Intrinsic are “as passionately independent about what they do as any independent adviser I know”.
“In a lot of cases they’re actually probably more anti-the wider Quilter and Old Mutual group than a traditional independent adviser. They almost actively select against it to prove a point.”
More money in restricted
Barrett is more concerned by the fact that restricted advisers are generating more of the total revenue for the advice industry when they are substantially outnumbered by their independent peers.
Independent financial advice accounted for 85% of the advice on offer in 2016, data from the FCA revealed last June. Though restricted advisers made up 15% of the industry, they accounted for almost 40% of adviser charge revenue.
SJP generated £359.4m ($472.4m, €404m) from advice charges over the first half of the year. Clients pay a 5% entry charge up front, in addition to the ongoing charges figure and any transaction costs associated with the underlying investment. The firm said the initial fee covers the cost of setting up the investment and the initial advice.
SJP’s advisers also receive commission. The firm took in an additional £51.8m during the period from third party fees and commissions on advice in the first six months this year.
Hargreaves Lansdown saw £50.6m of net revenue come from advisory fees, Funds Library sales and ancillary services. Its advisers are not commission-based.
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