Safeguarding access to SRI post RDR

The FSA’s retail distribution review (RDR) is a regulatory landmark for the financial advisory world. It is due to take effect from January 2013, so 2012 will be a big year for financial advisers, with lots of extra challenges in addition to the day job. Its impact on the SRI community however remains unclear.

The RDR aims to benefit consumers by improving the professionalism of the sector. This includes a significant focus on issues such as adviser remuneration – which means IFAs will no longer be able to receive commissions from product providers – and qualifications, which means more studying too. Its remit is far reaching, controversial and in some areas not finalised.

Advisers will have to pass additional exams, filling in any gaps in their knowledge by 1 January 2013. Once achieved they will be able to demonstrate their professionalism to clients and regulators alike by displaying a ‘Statement of Professional Standing’ (SPS) from their accredited professional body (such as the CII, PFS or CISI).

Until things settle the main challenge for consumers may well be to recognise what type of adviser they are talking to – as the terminology will be new.

Advisers who we generally call ‘independent’ today, who can sell products from pretty much any fund provider, will fall into two groups; ‘independent’ and ‘restricted’. Those who research the whole market will remain ‘independent financial advisers’ and those that focus on fewer product providers will be offering ‘restricted’ advice.

Some of today’s IFAs may well decide it makes more sense for them to switch to ‘restricted’, as the bar for claiming independence looks likely to be higher than at present. There has been much coverage in the press about how this will work in practice. A recent strategic review at AIFA (the Association of Independent Financial Advisers) has brought this into sharp focus this week. They have taken the bold step in deciding to support members from both camps – a decision that is ruffling feathers and is liable to rumble for some time.  A recent article in Money Marketing is one example.

The number of advisers that will be in each group is as yet unknown, but AIFA are keen get the view across the somewhat controversial view that offering ‘restricted’ advice may well make sense for some advisers, a brave message from a group that has built its 12 year reputation on supporting ‘independence’.

But for those of us in the green and ethical investment space this raises some fairly fundamental questions. What will this mean for the future growth of green and ethical investment funds? How accessible with such investments be for individual investors? Will it help or hinder the necessary transition to more sustainable finance?

On the face of it, the risk that significant numbers of today’s ‘IFAs’ may shift towards offering fewer funds is not good. Yet in practice it is presumably unlikely that many advisers who offer advice across a wide range of funds would give up that ability for choice. And those who do not offer a wide range of options may be less relevant anyway.

What’s more – the ‘restricted’ world may be a useful training ground for future IFAs – easing newer recruits into the more complex end of the market, offering career options beyond the traditional tied routes. It may even encourage more graduates into financial services.

Although legislators, regulators and the press have not always been kind – or even particularly fair – to financial advisers much criticism has probably been well founded. The sector has not earned the trust of the public in the way that other professions have – and this has hampered its growth. As such there is a chance these changes may have a positive impact in the long run.

So although the next few years are likely to be bumpy it is well worth keeping focused on longer term. The future for the SRI market looks bright as so many of the basics are now in place.  And from January 2013 the financial advisers will be starting to settle in the the ‘new normal’.

Without the benefit of a crystal ball it is hard to know how these two will fit together over the coming years.  A betting person may well say that it could work out well.  Given their rapidly accelerating success platforms and wraps they are likely to have a significant role to play – and today’s FSA paper on the subject  appears unlikely to change this.

It may be most advisers will have reasonable access to a wide range of options via platforms and wraps post 2013.

My thoughts for fund providers – make yourselves visible and attractive to platforms. They may only be something like 25% of sales at present, but the market is growing fast.  And for advisers – time will tell, but whatever route you take make sure your clients have access to a range of SRI styles … Given the prevailing winds clients needs are unlikely to become less diverse over time!