Is restricted advice right for your business?

In the third of a six-part special on preparing for RDR, Danny Wynn, director of platforms and policy at Legal & General, examines what going 'restricted' really means.

The implementation of the RDR is now only 15 months away. Sure, there are a few key questions outstanding (legacy and VAT) but these cannot be used as excuses for not pushing ahead with transitioning our businesses. The new rules are here, adviser charging IS happening for investment related advice. So is the introduction of tougher requirements for independence and new status disclosure. And let’s not forget new qualifications and increased professionalism requirements, there is surely no doubt they are happening too.

But what does this really mean for IFA businesses? Conventional wisdom is that the whole market is going to move to relationship-based advice and focus exclusively only on the wealthiest in our society. While I agree that this will be the general trend I am certain that it will not be the only model.

There are already transaction-based businesses who discount all initial commissions back to 3%-4% and are not reliant on recycling older investments to generate the business volumes required. Adviser charging does not seriously impact the economics of these efficient business models, although the increased transparency and explicit nature of remuneration may pose a perception problem with some customers.

Alternative models

I believe that the new market forces introduced by adviser charging will compel advisory businesses to become increasingly efficient and the true innovators out there will find profitable ways of engaging with and servicing the majority of the mass market.

Many who have spoken to me on the subject will know that I am far from convinced that there are enough wealthy (advice-taking) clients in the UK to support all of the existing IFA population, even allowing for exits, meaning many will be forced to explore alternative models.

This is where restricted advice comes in to the equation which, I accept is not a popular view with many! When some hear the words “restricted advice” they immediately think of [multi-]tied, but this is to take an over simplistic view. Put simply, restricted advice is a service that does not meet the new independence requirements. Many, if not most, of the IFA offerings today do not currently satisfy the new independence requirements but how many believe you are not offering your clients a valuable and suitable service?

I am not for one minute suggesting restricted advice is right for all, but the decision is a practical not emotional one. Going ‘restricted’ could be viewed as an enabler with some customer segments rather than an inhibitor.

By freeing itself from some of the obligations of being independent a business will be able to take decisions and realise efficiencies which enable it to engage profitably and deliver value to customers whom otherwise would be excluded.

Neither does it involve giving up control of your business, like I said it is not [multi-]tied, if anything it allows a business to take more control by allowing it to focus only on those areas which it believes deliver maximum value to its customers.