Classes of advisers
Tied agents of product providers
A provider’s company representative or appointed representative of one marketing group could only give investment advice on that group’s products. The representative’s duty was to select the most appropriate product or service for the client from the range of products offered by the provider they represented. By law, they were forbidden to select products from any other provider, even if they could indisputably prove that the alternative company offered superior products.
However, the adviser was bound to identify situations where they themselves have no product which will meet the client’s needs. If such an area is identified, then the tied agent may introduce the client to an independent financial adviser.
Some tied agents are appointed representatives of a product provider; some are individually authorised firms within the same group as a product provider; others are individually authorised businesses which are not in the same group of companies as the product provider.
Under RDR, tied agents fall into the ‘restricted advice’ category.
Multi-tied agents occupied the middle ground between tied agents and Whole of Market (WoM) advisers. These advisers could arrange ties with a number of product providers, enabling them to offer a wider range of products and providers than a tied agent, but without the need to consider all product providers. The job of a multi-tied agent is to find the most suitable product for the client from the range of providers to which the firm is tied. If a multi-tied agent is tied to just one product provider per product type this may be a relatively easy task. However, if it is tied to more than one provider for a given product type then the selection process would be similar to that for IFAs.
Some multi-tied agents are tied to one producer for each product type they deal in; for example, life office A for term assurance and whole life policies; office B for single premium bonds; unit trust managers C for unit trusts; and life office D for pensions. Other multi-tied agents could be tied to more than one producer for a particular product type.
Under RDR, multi-tied agents fall into the ‘restricted advice’ category.
Whole of Market (WoM) advisers
Unlike ‘tied agents’ WoM advisers were able to select products from any product provider. As a result of this they were generally expected to have a wider awareness and knowledge of the available options than a tied agent of a product provider limited to the products of one insurance company or one unit trust company. In legal terms a WoM adviser was the agent of the client not the product provider and was, therefore, obliged to select not only a suitable product for the client, but also to select a suitable provider for each product.
The choice of product provider would often be made with regard to the price (or premium) for that product. However, the WoM adviser could also take other factors into account where appropriate, e.g. the financial strength of the provider, its investment performance, the quality of its customer service and its administrative ability (including the speed of settling claims). The amount of commission payable should not have been a factor.
As regards the financial strength of the provider, a great deal of work has been done to provide standardised financial reports on each company, but at present it is still very difficult to perform an exact comparison of the relative financial strengths of companies.
It is accepted that some factors may often be capable of subjective analysis only, although various information sources relating to past investment performance should be consulted. While past performance is not necessarily a guide to future investment returns, there is little doubt that the investment management performance of some life offices would leave the recommendation of their products by a WoM adviser requiring more than a little justification.
WoM advisers are required to have professional indemnity insurance and a WoM adviser who is a sole trader (of which there are very few left) must arrange for a locum (i.e. another regulated firm or individual who would be able to complete any unfinished business that was necessary) to deal with clients while they are on holiday.
Under RDR, WoM advisers fall into the ‘restricted advice’ category.
Prior to RDR, independent advisers were WoM advisers who offered clients the ability to pay by fee only. The use of the term ‘independent’ was restricted by the then regulator, the FSA, to those firms which offered this option; the reasoning behind this restriction was that this would negate any potential commission bias an adviser or a firm may have had. The firm could have offered more than one remuneration option and therefore the retail client could have chosen to pay via commission (rather than by fee) even though the firm was independent. In addition, if the client chose the fee option the firm could receive commission from the provider but this must have been refunded to the client, added to the investment or offset against any fee charged.
So, firms which offered advice from the whole of the market, and offered a fee only option could have called themselves independent financial advisers (IFAs). There were also intermediaries who had access to the whole market, or a whole segment of it, but could not call themselves IFAs because they did not offer customers a fee option. This situation has now changed. The FSA made substantial changes to the retail market, which distinguishes between ‘sales’ and ‘advice’. The rules in the Retail Distribution Review (RDR) include the requirement for independent financial advisers to offer ‘unbiased, unrestricted advice, which is not influenced by product provider influence or remuneration’. These new rules took effect on 31 December 2012.