Will Consumer Duty put restricted advice propositions under pressure?

How important is independence when seeking advice?

When we look for advice, we are likely to reach out to someone who understands the subject, someone who understands us and our goals, and probably someone who understands the risks of any potential options we have.

What about independence?

You would assume that when we look for advice, whether that’s from a family member, a friend or a colleague, that they don’t have a vested interest in a particular outcome. That may well affect the advice we receive. There are, of course, advantages and disadvantages to both depending on an individual’s goals and needs but it does beg the question of whether the millions of people that turn to restricted advice over independent, are aware they are doing this?

Advisers should be looking at the approach of Consumer Duty as an opportunity to stop and consider whether they are explaining how they arrive at decisions correctly? How they demonstrate that they are delivering value to their customers?

It’s important to note wider industry trends have been placing pressure on ‘independence’ for some time. Consolidation of firms and the creation of more national firms means that many advisers are constrained by the decisions of investment committees.

In theory they have the ability to build the white-listed funds but the reality is that this is time consuming, difficult to achieve and potentially more costly. While there is clear benefit to the firm, and many would argue to the client, in operating this model it should also be noted that true ‘whole of market’ advice resides primarily within the smaller, advice firms who have more freedom to construct portfolios aligned to specific customer needs.

However, more questions arise. Do customers understand this when they sign up to a national ‘independent’ financial adviser? National firms are marketing themselves to take advantage of their size and scope, do they also need to be clearer with customers as to tailoring that is on offer?

Ironically, the issues driving this consolidation are often cited as increased cost, many relating to compliance with regulations. Among the many effects of this increased regulation may be the restriction of true independent advice, perhaps at the expense of the customer outcomes.

On another level, the true restricted advice market is huge, with St James’s Place reaching AUM of £142bn in 2022. Vertical integration has been on the rise in the adviser market over the last couple of years as manufacturers look to secure inflows into their products through the distribution market.

When taking this form of advice, there is a need to disclose that the customer is receiving restricted advice so, at that level, the basic requirement is met. However, there are two key questions that firms offering restricted advice need to ask themselves to make sure that client understanding is there. Firstly, do customers really understand what they are being told, and what the alternatives are? As a result, are they really signing up to this model, or just unaware of the alternatives? We can’t expect that a restricted advice firm to point a customer to a whole of market alternative, but without the customer having had this  explained, how can any firm ensure that consumer understanding is there?

The second question is whether a firm is actively managing the potential conflict of interest in this distribution model. How do they  make sure the recommendation is aligned to the customer’s, rather than the firm’s, needs – for example, where an investment product with a bigger margin is recommended over alternatives?

Which brings us on to the other big Consumer Duty question: how is restricted advice going to demonstrate good outcomes in relation to price and value? According to unbiased.com, the correlation between restricted advice and lower fees is not as some would expect¹.

However, multiple reviews have questioned the performance of funds offered within this model. For example, the recent Yodelar review of St James’s Place, rated 80% of their unit trusts as underperforming². We have also recently seen the issues of under-performance with Quilter’s Cirilium active funds.

Where good performance is being achieved, then value is easier to demonstrate, but if this doesn’t happen, where is the value for the customer? The answer may be in the service provided. Often these firms offer a slick sales journey, multi-channel communications and performance updates. For some customers, this may be highly valued, but for the majority the primary reason for advice is to ensure that suitable investments are selected which provide returns and reduce risk.

Consumer Duty is mandating firms to look at these questions and firms will need to demonstrate that they are delivering good outcomes through price and value, and consumer understanding. Many independents have been questioning this model for some time.

If firms aren’t clear of the value they are offering, then it could be Consumer Duty which raises the biggest questions going forward.

References:

1: Independent versus restricted advice: What’s the difference? (unbiased.co.uk)
2: St. James’s Place Review (yodelar.com)