Independent financial advice

This morning I attended a mini-conference run by the ICAEW helping financial advisers to ensure that if they hold themselves out to be independent, that they do indeed provide independent financial advice. This is a hugely important issue and so I was a little surprised to find that there were not many in attendance, perhaps because it was a pay-for event, or of course, perhaps many advisers felt that this was not a pressing issue for them.

New rules are black and white

Independent financial advice is important to me, because I believe it enables me to provide a far better set of solutions for clients – being unrestricted and therefore the widest number of options. The new year saw a clear regulatory distinction between the types of licensed financial adviser – either independent or restricted, not a mix or a fudge. There was helpful legal insight from two Barristers who helped unpack the nuts and bolts and attempted to put this into plain English. One would have thought the distinction should be fairly straight-forward, but as ever, words and phrases are open to interpretation. One position might argue that to be truly independent, the adviser must consider all forms of investment products from the entire planet – including those not written in English. The FSA define independent financial advice as:

a  personal recommendation is based on a comprehensive and fair analysis of the relevant market and unbiased and unrestricted“.

This it the litmus test for independent advisers. This is built upon a series of basic principles of being a faithful fiduciary and legal test cases of what constitutes a professional adviser (in any field). This is of course what I do have done for clients – the main issue being one of applying a degree of common sense and filtering out options that are either certainly or highly likely to be unsuitable investments for a client. By way of a silly example, a ponzi scheme would be an unsuitable form of investment in my opinion.

Independence should not be compromised

The problem with all advice is that the end result takes many years. One of the many reasons I spend time with clients reviewing their planning, is precisely because things change and we need to revisit assumptions. We have to apply common sense and frankly a high degree of transparency and not hide the reality of performance, charges or choices. The new rules don’t really make a lot of difference to our clients in terms of our transparency, however many firms are unable or unwilling to do the work to be independent. I admit that the work can be onerous, but be warned that dismissing the new terminology as “nonsense” is a mistake and folly on the part of any adviser. Sadly many of our “trade bodies” are now also fudging the issue of independence, which is why I do not belong to them and joined IFA Centre, which promotes the value of independent financial advice.

Going deeper and further

I would suggest though that the issue of independent advice doesn’t really go far enough for me, impartiality is more difficult to achieve as it precedes investing. I would suggest that it is not only vital to be independent, but also vital to be impartial – by which I mean, being open to the notion that paying off debt might be a better use of funds, or making “investments” into a variety of “things” that don’t come under the remit of financial advisers – such as buying art, residential property, a business or even giving the money away. This is why I attempt to distinguish between financial planning (creating solutions and options to solve problems or objectives) and investment advice, which by its very nature assumes that investing in traditional financial instruments – stock markets and bonds is the appropriate solution. I want bigger, deeper and wider conversations with clients about their values and priorities so that impartial advice can be provided. This is, to my mind a better result.