Demonstrating Independence

PROFESSIONAL INVESTOR: In a post-RDR world, advisers who chose to take the "independent" path must ensure they are in compliance with the rules and demonstrate their independence

Anastasia Georgiou 12 February, 2013 | 5:38PM

This video is part of an on-going series of articles and videos tailored specifically for professional investors and financial advisers. 


Anastasia Georgiou: I'm here with Mel Holman of Compliance and Training Solutions, and we're going to be talking about compliance issues.

Hi, Mel.

Melanie Holman: Hi.

Georgiou: So, in a post-RDR world, what is the biggest issue that you're hearing from advisers?

Holman: Well, it's still about the decision of whether to deliver independent or restricted advice. I think in the main, most advisers from my experience, are wishing to deliver independent advice. It’s just trying to get their head around, even at this late date, how they're going to do that.

Georgiou: So, can you define what independence is?

Holman: Well, technically, it's a personal recommendation delivered to a retail client, which is based on a fair and comprehensive analysis of the market and has to be unrestricted and unbiased.

Georgiou: So, what does the adviser need to do to demonstrate?

Holman: Yeah, good question. Basically, they need to get their head around that it’s not just saying that they are whole-of-market and offering to pay for the advice by fee. They need to make sure that they are actually properly looking at the retail investment product list and what products can actually meet the clients' objectives, so they're not restricting themselves at all. The problem comes to how they actually demonstrate that and to getting their head around what that means.

Georgiou: For an advice company that has an investment committee, how does that work?

Holman: Well, an investment committee is a good starting point. Investment committees usually get together perhaps quarterly or half yearly, perhaps monthly, and that can define what the firm's target market is and how they intend to deliver independent advice. Some firms have used Tim Hale, for example, and (some) really good investment policy statements are being produced. But they still need to demonstrate that they're delivering independent advice to that particular client for that transaction and that's what advisers need to get their head around.

Georgiou: Okay. So, as a starting point they definitely should document their process?

Holman: Absolutely, yeah.

Georgiou: Do the advisers actually have to let the FSA know whether they're going independent or restricted?

Holman: No. I've had a few questions on that. Basically, the FSA would gather the data through the new GABRIEL returns, which are being delivered this year. So, Section K asks specifically are you delivering independent or restricted advice or both, and then later towards the end of this year, I would imagine that the FSA would start to bring together that data and then focus their reviews based upon that.

Georgiou: So, of the advisers that you are working with and those that are restricted, where do you think they fall down?

Holman: For restricted advisors?

Georgiou: For independent, sorry?

Holman: I think, the main thing – they need to demonstrate that they're delivering the independent advice for that particular client. So, whether that's a series of filtering questions, for example, or looking at a target market, having a panel perhaps, which is a great starting point.

The thing that they need to know that – well, two things: If they now have a panel, they need to make sure or identify when they need to advise off-panel. So, you might have a client that doesn't meet the target market, for example. And the other thing is to demonstrate through CPD that they're looking at a wide range of products, not the ones they just generally advise upon.

So, for example, they need to make sure that they're doing throughout the whole of the year CPD on structured products, investment trusts, ETFs, especially if that's not the type of product that they recommend normally. Being an independent adviser you can never say never; you have to be able to deliver advice, be able to recognise when a particular product will be suitable for the client.

Georgiou: Thanks Mel. That's all we've got time for today.

Holman: You are welcome.

Georgiou: I hope you find that interesting. Thank you for watching.

Morningstar offers products and services for financial advisers including Morningstar Adviser Workstation, the multi-award winning practice and portfolio management system for financial advisers. Click here to learn more about this all-inclusive platform designed to support core aspects of your business in an RDR world.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Anastasia Georgiou  is the product manager for Adviser Workstation in the UK.