22nd May 2012

Independent, Restricted or IFR, a third way?

As a country the UK has moved away from the manufacture of goods and products and has moved toward the manufacture and provision of intangible goods and services. 

 

It is a fact that any business that “designs and manufactures” products has done so because it has identified a consumer need and in doing so then needs to create awareness and find a way of getting it distributed- that means finding someone to sell it-a sales force.

Financial services are often referred to as an industry, seldom linked to a Profession, until the RDR arrived. The FS industry is made up of many different provider “manufacturers” large and small. They have all designed often very similar intangible products to address a vast array of perceived financial needs (and some un-perceived one’s too) for both personal and corporate consumption. 

And yes, they need somebody to sell these products, and yes, like in any industry the sales process needs to be incentivised. That incentivisation traditionally was in the form of a transparent, declared financial reward, a commission, a consideration! The buyer had a choice based upon a myriad of factors to buy or not. 
 

This is not a difficult theory to understand and these same firms will need people to distribute (sell) products post RDR but with the added bonus or burden of not paying for the incentivisation. 

 

The FSA is intent on changing the face of financial services in terms of qualifications, standards, remuneration and creating a greater degree of perceived professionalism. In doing so it is removing the word sale and replacing it with advice.

Many of the RDR thought processes are not without substance, merit or benefit. After all to improve knowledge demonstrated by exam, raising standards and creating an aura of IFA professionalism is laudable. 

 

But, by doing so in the way suggested blurs the lines between the wish to create the “Professional IFA” and the distribution of FS products as part of the offering, and that is where I believe, the whole RDR process starts to go “wobbly”.

A definition of a profession is a vocation founded upon specialised educational training, the purpose of which is to supply ‘disinterested counsel’ and services to others, for a direct and definite compensation (reward) and wholly apart from expectation of other business gain. 
 

In other words the “Professional” provides the advice but does not “dirty their hands” with arranging the purchases of products, services or goods that may attach to that process of ‘disinterested counsel’. This “Professional” status historically applied to divinity, medicine and the law.

Although most professions enjoy high status and public prestige, not all professionals earn high salaries, and even within specific professions there exists significant inequalities of compensation. Today the spectrum of professions is broad indeed from Architects and Accountants to Teachers to Social Workers and shortly when the FSA wish is granted, Financial Advisers will be added to the list. 



So, if we examine more deeply the view that the “purpose of a profession is to supply disinterested counsel and service to others” we note that the word “product” is missing and creates the RDR conundrum.

Why?

Because by putting the distribution of products into the same place as creating a fee based profession means a conflict of interest. Where “counsel” or advice sits alongside the distribution of a product, tangible or intangible you have a problem. Solicitors, Accountants, Surgeons, Architects and many other professions that the FSA would like to see financial advisers compared to do not deal in product. 

 

Their expertise is by way of applying analysis to a set of problems and coming up with an intellectually based solution or plan, often of their own unique bespoke design, as a result of qualification, experience and training then putting that solution or plan in place. They will not normally get involved in the execution or influencing of purchasing product as an integral part of that process. 



Professions do not operate in mass markets and most certainly not with a view to assisting manufacturers in the distribution of their product. Professions do not normally sell or arrange the purchase of substantive goods or products, tangible or intangible. 

Because financial services institutions derive revenues and profit resulting from predominantly mass-market product distribution the idea of creating a profession that is involved directly or indirectly in financial services product distribution too is quite incompatible. 



So what of the RDR in light of this scenario? 
Regulation should be more about foresight and less about hindsight. It should perhaps separate advice and product. This may be a simplistic view that is at least worth a discussion, but KISS seems a pretty relevant acronym to use for an RDR route map today? 

So Soren Lorenson may have a point in suggesting that we should see a new breed of distributor; the IFR - Independent Financial Retailer. 

 

An IFR is paid a fully disclosed commission, a consideration by the provider for the sale of a product, just like any other retailer. They can offer basic advice around the product being purchased and will select a suitable provider to match the needs and advice given by the “expert”.

 They will not select or recommend the product or endorse the advice as suitable. They could be an execution only outlet too. 

A big plus for this separation of advice and distribution would be that any liability would sit firmly and clearly with the adviser who gave the advice and recommended the product. After all until we get product licencing, the liability for redress either by firms or the FSCS is determined by the advice and not if the product fails or is a “duff’un”. 

RDR, Panacea Comment