Will product providers pull the strings when they own 'independent' advisers?

For independent financial advisers, the most cherished part of their title is the "independent". But that has often been a source of debate, given that most IFAs are paid commissions from insurance companies and fund managers for selling their products to clients.

And there could be greater cause for concern over the independence of the estimated 25,000 IFAs in Britain when a reform called "depolarisation" is introduced at any time from the end of this year to the middle of 2004.

Under the current system, financial advisers either sell products from any provider across the market - and so are called "independent" - or they are exclusively tied to one provider. However, under the depolarisation proposals of City watchdog the Financial Services Authority (FSA), there will be a third option: tied advisers will be able to offer products from a limited number of other insurers or asset managers, in a system known as multi-ties.

Another announced change is to scrap the "better than best" rules, which stipulate that if a provider owns more than 10 per cent of an IFA, that firm can only sell its products if it can prove they are better than anything else on the market. In effect, this has stopped an IFA selling products from an affiliated company.

The planned scrapping of this rule has resulted in a number of providers taking stakes in IFA firms. The most active has been Aegon, which over the past year has bought five IFA firms and taken minority holdings in another three.

Cynical observers might question the motives of product providers buying IFA firms. Aegon argues, however, that the IFA firms form just another part of its UK financial services empire, which includes Scottish Equitable.

"There are 'Chinese walls' between the different divisions within Aegon UK, such as the insurance, asset management and distribution [IFA] businesses," says Keith Robinson, the operations director of Aegon UK Distribution. "These divisions do not sit together and have separate management. When the directors of distribution meet our five IFA firms, product providers are not discussed.

"Aegon UK has bought the IFAs to make money through increased profits and not selling more Scottish Equitable products. This will be done by giving them greater capital strength and centralising functions such as customer complaints."

Gareth Marr, the chief executive of Advisory & Brokerage, the IFA bought by Aegon in August 2002, agrees that the capital injection by product providers is important in safeguarding the future of IFAs, given the rising costs of compliance and IT.

"In choosing an IFA, consumers need to consider if a firm can provide the necessary standard of advice and is their loyalty to them or someone else?" he says. "To retain our credibility as IFAs, we cannot simply give most of our business to Scottish Equitable."

Financial strength is an increasingly important issue for consumers when selecting an adviser. Professional indemnity (PI) insurance for IFAs has risen by an average of about 60 per cent over the past year as fewer underwriters are willing to take on the risk.

This has led to the FSA admitting that, at the moment, about 400 out of 4,500 IFAs requiring PI insurance cannot afford it. The FSA says these firms have enough capital to meet the risk of being sued for bad advice, and as a back up consumers can use the Financial Services Compensation Scheme. But this only provides compensation of up to £48,000 for investments, 90 per cent of the policy valuation of long-term insurance, and a maximum of £31,700 for deposits. Whether an IFA has PI cover should be another consideration for consumers.

The Consumers' Association says it is very concerned about the scrapping of "better than best" and is opposed to depolarisation. While there is an estimated 80 per cent retention rate for annual premium policies sold by IFAs, this falls to 60 per cent among direct salesmen employed by insurers, indicating a lack of satisfaction with their advice.

"When the new regime has bedded down, consumers are going to have to be a bit more picky about the financial advisers they see and a bit more confident about the questions they ask," says Teresa Fritz, a senior researcher at Which? magazine. "Good advisers do not mind being asked questions about qualifications, fees and experience. Poor advisers get nervous at these sorts of questions and can easily be weeded out."

She adds that consumers should look for an independent adviser with an advanced financial planning certificate, as well as speaking to at least three advisers over the phone to get a feel for their service and how much they charge. It's also worth asking how they choose products and whether they have links to providers.

Richard Craven, the managing director of IFA The Money Portal, says an IFA is vital for consumers seeking more specialised products. "In investment, banks and building societies are tied, but research-driven IFAs can provide information and analysis on every fund in the market."

Nick Cann, the chief executive of the Institute of Financial Planners says it is crucial that people know their own needs and demand impartial advice, regardless of any links with product providers.

"Consumers must decide what they are trying to achieve - whether it is saving enough for retirement, being able to work less hours or paying school fees. Then they must find an adviser who can establish a plan for the whole of their finances, rather than simply sell them a product like a pension."