Knowing the difference is important to make sure you get the right type of advice
An Independent Advisor considers all products from across the whole market whereas a Restricted Advisor can only recommend a limited amount.
A Restricted Financial Adviser usually only offers and gives advice on the financial products that are put forward by the firm the adviser is employed by or from a limited section of the market.
An Independent Financial Adviser (IFA) in contrast has no such restriction and, as a representative of the client, can look across the whole of the market to find the best mix of financial products for the clients’ situation. An Independent Financial Adviser must be able to show they have researched every relevant financial product on the market, and every provider supplying that product, before making a recommendation. This process must be clearly documented and their recommendations justified and evidenced.
Whether an adviser is Independent or Restricted, it’s still important to check if they are regulated correctly (you can look them up on the FCA Register), have the appropriate qualifications (such as from the CISI), are upfront and honest about their fees (as we are with our fixed fee pricing) and that you feel that you can trust them with your financial future.
As part of the regulated advice process in the UK, all Financial Advisers must be clear on what type of advice they offer, Independent or Restricted, and what that means. Restricted advisers and firms are not allowed to use ‘independent’ to describe the advice they offer and the fact they are restricted should ideally be made clear from the start.
When discussing the possibility of receiving advice from a Restricted adviser it should be made absolutely clear that you will be receiving restricted advice and what that means in practice, including any limitation in terms of what products and services they can offer, how much of the market they are restricted to and what the implications are for the advice you may receive. Also, if the products they offer aren’t suitable for you, then they must make this clear and recommend you seek advice elsewhere.
Remember that a good financial adviser should always be up-front and clear about what service you will receive and the limitations as well as the benefits.
The most appropriate solution for you. No matter your situation, you will need to use a variety of financial ‘products’ to help you with your financial plan. These could include pensions, shares, tax wrappers such as ISAs, life assurance products, bonds, annuities, and many different types of investment funds. Not only are there a range of different types of products, there are a range of them from different providers and will all have different costs, features and restrictions.
The best products and providers for one person may be very different from the best for another. An Independent Adviser will be able to match you with the right mix of the right products, companies and funds from across the market.
A Restricted Adviser will have to fit their client’s requirement into the available (restricted) range of products and solutions they have on offer.
Cost control – being able to consider all products in the market means that an independent advisor will be able to potentially select lower priced providers and investments, saving you ongoing costs which can have a big impact on your long-term gains. A restricted adviser will only be able to offer a limited range.
More customised advice – the ability of independent advisors to choose from the wide range of products on the market means that they are better able to tailor a plan to your specific financial situation. There are often a few different ways to tackle a financial problem, and these different solutions can use different types of financial products. Having a larger range and type of products allows for more alternative solutions and a much higher chance of coming up with a better solution/plan for the client.
The best analogy in this regard is to think of tailoring. An Independent Adviser is able to create and manage a bespoke solution for their client, the equivalent of a tailor made fit; a Restricted Adviser has to offer an ‘off-the-peg’ solution, even if it is not a perfect fit.
Specialised Areas – there are specialised areas of advice where the distinctions between an independent approach and a restricted approach become more apparent than ever. Take the position where an individual is coming up to retirement and they may have a pension fund that needs converting into income. In this instance, there may be numerous options: annuities, drawdown, phased retirement options and other products. It seems obvious to state that at this critical point in time, all individuals should have all options available to them. Many restricted advisers (ironically including some of the biggest providers of retirement solutions in the UK) do not have all of these options to offer their clients. The most important element is to have all avenues open for consideration.
Another example is in the area of tax planning: where individuals are looking to put in place provisions against Inheritance Tax (IHT). There are many possible ways of planning to mitigate IHT which can include, for example, the use of allowances, trusts and IHT exempt investments, such as an Enterprise Investment Scheme (EIS). Some restricted advisers will not have access to EIS investments, blocking off one of the better options available.
Asset allocation – where investment advice is required, the most common method of finding the right mix of investments is via an asset allocation model. This is where the investor’s requirement is aligned to a carefully selected asset split, which will be married to the investor’s risk tolerance. Over many years considerable research has been undertaken into the best way of constructing portfolios and generating returns within given risk parameters; time after time the results from the research show that asset allocation is the key determinant of future returns. The asset allocation decision is the key influencer.
An Independent Financial Adviser can construct an asset allocation approach without any restrictions. As this is generally considered the most important part of the process it is crucial for investors to know that they can have the right asset allocation for their circumstances; they should not be forced into an asset allocation model which is determined by their adviser’s restricted available solutions.
When deciding on a financial adviser, the cost of advice is an important part of the decision. To work out if advice is of value, you need to know the costs as well as the benefits, to help make the right choice.
Every adviser, restricted or independent, will have a different approach to charging and as each client’s situation is different there is no readily and easily available set of prices for comparison. Many adviser firms still charge on a percentage basis – with 3% of your assets being the most common. Some others, like ourselves, prefer fixed fee pricing, which is based on the work done rather than how much money a customer has.
However, it is important to understand that the fee you pay your adviser is not the only cost that you need to think about, and it is these costs that may be different depending on if the adviser is independent or restricted.
Financial providers charge a fee for providing their product or service – whether that is a management fee for running a fund or a service fee the pension platform charges for looking after your pension. As these fees are ongoing and often related to the size of your investment, they can have a big impact over time and eat into your returns. An independent adviser will look across many different providers and will take into account the different costs as well as the different services being offered. A restricted adviser does not have this ability, and so is limited in the costs reductions they can make.
The other cost, which is harder to put a price on but is arguably the much greater cost you need to think about, is the cost of positionally and not getting the best financial advice that you could; although a restricted advisor will try to give you the best advice they can, they will naturally have limitations in what they can offer which they can’t overcome. In some cases there may be an illusion of cost saving as you chose between a cheaper product in their range, but in reality, you are only saving compared to a more overpriced product or service.
A good adviser will be upfront and transparent about their costs, aiming to justify that fee in areas such as longer-term investment returns and tax mitigation. Most IFAs, such as ourselves, will offer a free consultation at an initial meeting to understand which areas you would like financial advice on, to identify how they could help you, and for you to get a sense of whether you would feel comfortable working with them
There is a lot to consider when choosing a financial adviser. It’s an important decision to get right as you want someone who you can trust will get the best results for you and your money. By deciding if you prefer either an independent or restricted adviser early on, you can help make that decision easier by removing a number of potential advisers from your list.
We are independent financial advisers and believe that this is the only way to offer the best financial advice to our clients. We think if we restricted ourselves to only a small number of products or only a part of the market then this would limit our ability to work out the best solutions for our clients. There are a large number of funds, pension providers, investment platforms, and other products out there and we want to make sure we have the ability to select the best combination for whatever situation a client has.
Using a restricted financial adviser does not necessarily mean you’ll be getting ‘bad’ advice. All financial advisers must have a similar minimum level of qualifications and meet the same standards. However, it does mean that the choices available to you may be limited, and this might not be in your best interests. If you do decide to use a restricted adviser then it would be sensible to check which companies the restricted adviser works for (and so which products they are limited to offering you) and how other restrictions in the advice process will affect you. Be wary of advisers that do not clearly disclose that they are restricted and what this means.
We tailor our advice to suit your needs, and we will never recommend a product that we don’t think is 100% right for you, and will always give you clear and comprehensive reasons behind every recommendation we make. Ultimately, if a restricted adviser recommends a pension to you, you can never be entirely sure whether it is the right pension to suit your needs, or just that they get paid to sell this particular pension to you.
There are many other factors to consider when choosing a financial advisor, but hopefully you are now better able to understand if you want a restricted advisor or independent.
If you would like any more information then please get in touch and we will be happy to help you.