What does ‘independent’ really mean?

Independent Financial Advice has long been seen as the gold standard of financial advice.

It is considered superior to other forms of financial advice because it means the adviser is acting on behalf of the investor, rather than on behalf of one or more firms.

The use of the title Independent Financial Adviser (IFA) is protected by law, and requires the user to uphold certain minimum standards.

But what does ‘independent’ really mean in the context of financial advice?

Under current rules, to be an independent financial adviser you must offer whole of market advice and offer all customers the option of paying by fee for any advice.

This means that the word ‘independent’ refers to both scope of product selection and the absence of any financial incentive for the independent financial adviser to recommend a commission paying product.

The new rules that come into force on 1st January 2013 mean that a firm can only call itself ‘independent’ if it provides advice which is “unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market.”

It means that the adviser will be free to recommend what is best for the customer and have no restrictions to provide this best advice.

Because commission is being abolished for all financial advisers from 31st December 2012, the requirement to give all customers the option of paying by fee for any advice is effectively removed, because remuneration will always be on this transparent basis.

Any adviser who does not satisfy these requirements under the new rules from 1st January 2013 will be known as a ‘restricted’ adviser.

Here at Informed Choice we value the ability to be ‘independent’; not only in terms of product selection but without financial incentives to recommend products and with independence of ownership.

We believe that these are the three levels of independence that every investor should demand from their financial adviser.

The new rules being introduced on 31st December 2012, which introduce a distinction between ‘independent’ and ‘restricted’ financial advisers, have the potential to cause confusion. Independent financial advice is and will remain the gold standard of financial advice that investors should always seek.