B&F article
I have just come across this recent article in “Business & Finance” magazine written by a certain well-known contributor to AAM. I feel the article adds a lot of knowledge to the rest of us who maybe are not totally “au fait” with the debate that is taking place in the Broking industry.
I also just love the Heading on the article!
It was probably the sub-editors at B&F who dreamt that one up but it would’nt surprise me, given his capacity for wit, if this particular AAM stalwart put the idea in their heads!
Here’s the article:
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Knowing Your AAs From Your RAIPIs<!--EZCODE BOLD END-->
(After many years of self-policing, this year at last sees the implementation of a strict regulatory regime on all investment intermediary firms, which includes life assurance and insurance brokers and agents. All such firms are now regulated by the Central Bank and the new codes of conduct, which are due to be published shortly, will offer the consumer greater protection against fraud and dishonest advice. But, Liam Ferguson argues, the new regime won't necessarily evaluate for the customer which category of broker is best for his particular needs)
The new regime, under the terms of the Investment Intermediaries Act 1995, creates three new categories of broking firm - Restricted Activity Investment Product Intermediary (RAIPI), Authorised Adviser (AA) and authorised Cash Handler (ACH). Approximately 2,500 applications have been received from firms by the Central Bank for authorisation to operate in one of the above categories. By far the most popular category (c 64%) is RAIPI. In essence, a RAIPI can only give advice on the products of companies with whom it holds an agency. A distant second in the popularity stakes is Authorised Adviser (c 33%). An AA can advise on all products in the marketplace, whether or not it holds an agency for them. By extension, an AA is obliged to advise on the most suitable product for particular needs, irrespective of whether or not it holds an agency with the product provider. Finally, the small number of advisers (c 3%) who will be Authorised Cash Handlers will be allowed to exercise discretion in the management of client investments and as the name suggests will be allowed to handle cash. It will be obligatory for firms to clearly display their status on all headed paper and promotional material so it shouldn't be too difficult to recognise one from another. Don't be too worried if your local friendly broker doesn't display his status under the Act clearly at this time - the Central Bank will shortly be sending out the definitive code of conduct booklets to all firms, which will contain the required texts to display - until then you'll have to ask.
So that's the quick guide to the three types of adviser. The obvious question that follows is "Which one is the better adviser?" Unfortunately, the answer is not to be found in the Investment Intermediaries Act. At first glance, it might appear that consumers will get better advice from an Authorised Adviser or Authorised Cash Handler than from a RAIPI. After all, an AA or an ACH can and must offer advice across the whole range of suitable products available in the entire Irish marketplace. Indeed the Irish Brokers Association, one of two industry representative bodies, made it obligatory that all it's members become Authorised Advisers. In this month's Irish Broker magazine, Paul Carty, the Association's CEO writes "One simply has to be independent to do the job of a broker, and as such in the new environment it is only Authorised Advisers who are in a position to be truly independent. Therefore I suggest that only Authorised Advisers should properly be described as 'brokers'".
But let's just think about this for a minute. You pop into your local broker with the good intention of starting one of these SSIAs everyone's talking about. Your broker's an Authorised Adviser, so you presume that you're going to get the best advice across the whole marketplace. But your broker's got a problem. If he recommends an Ark Life or an EBS product to you, they won't pay him commission as they only distribute their products through their own channels. If he recommends, say, a Friends First or an Irish Life plan, he'll get paid commission. So what's he going to do? One solution is to recommend a commission-paying product to you first, and worry about valid reasons for justifying that recommendation afterwards. Is such a broker acting unethically? Certainly. Is he breaking the law? Probably, as he's not necessarily offering the most comprehensive advice. Is he going to get caught by the new regulations? Not if he's clever enough to document valid justifications why he believed the recommended product was best for you. While the Central Bank will audit brokers' files from time to time, it cannot reasonably be expected to argue with brokers over the relative merits of one product over another.
There's another flaw in the argument that an Authorised Adviser is by definition going to give more independent advice than a RAIPI. The product providers who choose to distribute their products through their own sales channels and not via brokers - Quinn Life, EBS Summit Funds, Ark Life, Lifetime, Royal Liver, Scottish Legal and Acorn Life - are under no obligation to reveal the technical details of their products to brokers. Why would they? Brokers don't sell their products - they're the competition. So how can an Authorised Adviser give you advice on a product when detailed information about that product isn't available? They can't, and until this situation changes, they are stuck with offering advice on the products of companies who will happily reveal their secrets - those with whom they hold agencies. Which in essence is the same advice you can get from a RAIPI.
Don't despair - the new regulations will make it far more difficult for a firm to run away with your money, and will raise the professional standards of how firms must operate. Just don't expect the new regulations to show you which are the excellent firms and which are merely average - for this information you'll still have to rely on the old method - ask for some recommendations from people who have used the services of a firm, and make a shortlist.
Liam D. Ferguson is principal of Ferguson & Associates and
www.FergA.com, RAIPI.