Investors shouldn’t be led by labels and assume that “restricted” financial advice is an inferior option, explains Lee Goggin, Co-founder of findaWEALTHMANAGER.com.
Recent research* has shown that the majority of the UK’s biggest advisory firms offer “restricted” as opposed to “independent” financial advice. But while these two labels connote very different things, investors should not take their meaning at face value: offering restricted advice is often the most sensible path for institutions and a better option for their clients in turn.
Without delving too far into regulation, UK institutions have been obliged to label themselves as either independent or restricted since the 2012 implementation of the Retail Distribution Review – a programme of reforms intended to drive up the quality and objectivity of financial advice. In essence, those working under the independent label can make recommendations across all the financial products available in the market, while those operating on a restricted basis typically recommend a more limited number of products, often from a limited number of providers.
At first glance, independent advice might seem the superior option by definition. Institutions may have therefore slightly shied away from declaring themselves restricted in their marketing literature, conscious of the negative associations the label could carry. However, we would urge investors to look beyond semantics alone to consider why wealth managers might choose to go restricted (as so many have) and why this might actually represent a better option for investors on balance.
A pragmatic path
First among the reasons a firm might opt for restricted status is a desire to stick to what they know best and are good at when it comes to recommending investments. If a firm’s client base tends to like quite conservative, mainstream products then there is little sense in them attempting to offer advice on the more esoteric (or risky) products in which their advisers do not specialise. In a tough investment environment like we see today, wealth managers may well see great wisdom in sticking to what they are comfortable with rather than spreading their investment research and management expertise too thinly.
Secondly, and no less important, are the business implications inherent in these two models. Being independent is by no means always an easy or cost-effective option, as underscored by the fact that many large institutions decided definitively against this soon after the RDR came into force. In contrast, taking a restricted approach means that firms can slash their workload in terms of regulatory compliance and investment monitoring, therefore enabling them to spend more time with their clients as well as keeping costs down. From helping them operate more efficiently to reducing Professional Indemnity insurance premiums, a restricted offering often makes sound business and financial sense for wealth managers – and in turn might be best for their clients.
To make a more subtle point, critics of the restricted model might say that firms often go down this route so that their can sell their own investment products, or those of their parent company. However, although this may create conflicts of interest on the face of it, again firms might simply be acting in the best interests of their clients. A lot of mitigating investment risk really robustly comes down to “looking under the bonnet” of all the constituents of a portfolio. So, when a product is manufactured and managed in-house (or close to), it is arguable that far better visibility might be achieved. Being sure of counter-party risk exposure is another crucial motivator in a post-Madoff world.
Most important of all, however, is for investors to remember that the restricted advice model does not necessarily entail any narrowing of the available investment universe. Those drawing on the products of only a select range of providers will have typically chosen these to represent all the investment options their clients are likely to require and the restricted label need not necessarily imply any constraints on diversification across markets, for example.
In conclusion, when it comes to the restricted versus independent label, investors should not be swayed on language alone. Just as model portfolios often represent a more practicable option than bespoke ones, so might restricted advice be the better path for both client and firm. For many – including some of the UK’s most prestigious wealth management brands – restricted is simply the more realistic route.
Whatever model of financial advice you are seeking there is sure to be an institution on the findaWEALTHMANAGER.com panel to suit your profile and needs. To start the process of meeting your best-matched wealth managers, simply try our smart online tool – completely free of charge.
*According to an analysis issued by Chase de Vere in March 2016, 13 of the largest 16 financial advice firms in the UK give restricted advice