Restricted and independent financial advice: myth vs reality

It's an issue that still causes confusion: can solicitors recommend a restricted financial adviser to their clients?

The answer is 'yes' and has been for some time. Yet misconceptions remain.

There are, of course, differences between independent and restricted financial advisers.

But whomever you choose to work with, your recommendations must be in your client's best interest.

Who can I refer my clients to?

Myth: solicitors can only refer clients to independent financial advisers (IFAs).

Reality: for more than a decade, solicitors have been allowed to make referrals to restricted advisers as well as IFAs.

Effective 1 January 2013, the Solicitors Regulation Authority (SRA) Handbook included a change to outcome 6.3 and indicative behaviour 6.2 that meant solicitors were no longer required to limit referrals to IFAs.

In the more recent SRA Standards and Regulations 2019, one of the key principles (Principle 7) is to "act in the best interests of each client".

The SRA Code of Conduct for Solicitors also includes requirements around acting fairly, service and competence, and referrals and introductions, which will be relevant when you're matching your client to a third-party adviser.

What's the difference between restricted and independent advisers?

Myth: independent advisers offer better financial advice.

Reality: the quality of advice a client receives should be the same whether they're taking guidance from a restricted or independent adviser.

The only difference is that the solutions from a restricted adviser may be different.

A restricted adviser can recommend certain products, certain product providers, or both, while an independent adviser can recommend financial products spanning the whole of the market and take on this selection themselves.

The expertise offered by a good financial adviser won't be dictated by the products they can offer.

Instead, both independent and restricted advisers can – and should – help guide clients to make the best decisions for their individual circumstances.

They should spend time getting to know your client and their objectives for the future, look at their personal situation and then help them make choices that will get them closer to their goals.

According to the Financial Conduct Authority (FCA), all advisers must ask detailed questions to understand a client's finances and attitude to risk before recommending any solutions (COBS 9.2 FCA Handbook).

As with solicitors, financial advisers are also required to operate in the best interest of their client (COBS 2.1).

What qualifications will they have?

Myth: independent advisers are more qualified than restricted advisers.

Reality: all regulated financial advisers need to have achieved certain qualifications.

Independent and restricted advisers must be authorised and regulated by the FCA to provide financial advice and have a Level 4 diploma in regulated financial planning.

They must also be registered with the FCA and have a statement of professional standing, which means they have signed up to a code of ethics and complete at least 35 hours of professional training each year.

Some financial advisers will have additional qualifications, such as the chartered financial planner or certified financial planner qualifications.

And if they specialise in a certain area – for example, later-life care or pensions – they might have further qualifications relating to that field.

How will I be charged?

Myth: restricted advisers are merely salespeople.

Reality: whether you and your clients work with an independent or restricted adviser, they can no longer be incentivised to recommend one product over another.

Since January 2013, advisers have had to charge fees for the advice they give, rather than charging commission.

This means their fee structure will be based on the level of service they provide, rather than the provider or product they recommend.

Advisers also aren't permitted to receive commissions offered by singular product providers (COBS 6.1A).

What can a restricted adviser offer?

Myth: restricted advisers can only recommend solutions from one provider.

Reality: restricted advisers may have a very narrow focus, or they may have a wide range of solutions to offer – it depends on the adviser.

They may advise on products from a handful of providers, or only offer advice in certain topical areas.

It is worth noting that if the adviser is restricted, they must explain the nature of the restriction.

This means you and your clients have full visibility and the information to determine if they are the right one for you.

Do I have to choose one?

Myth: solicitors can only use independent or restricted advisers.

Reality: solicitors can recommend clients to restricted and independent advisers.

Working with a variety of advisers often means you can present a few options to your clients. This means each client can find the adviser who is the best fit for them.

Perhaps it's a restricted adviser with a specialism relevant to your client's needs, or maybe it's an independent adviser who will conduct whole-of-market research to find a solution.

In any case, gathering as much information as possible about the financial advisers you work with – their culture and values, their areas of expertise, their advice process, their fees – will help to ensure your client is able to make an informed decision on how to proceed.