What do you do? Your client has inherited some (insert company name) shares and she asks you, as her trusted financial planner, what to do with them.

Do you tell her that you don’t advise on individual shares and recommend that she goes to a stockbroker? But wait, that loses you credibility and might look bad. Does it compromise your independence?

Do you go right ahead and make a recommendation to hold, or sell, or even buy some more? But as shares are designated investments, that’s an assessment of suitability and a personal recommendation. It requires adequate KYC and the issue of a suitability report.

And to make a buy, sell or hold recommendation you need to have done some appropriate research. How do you do that on an individual company share?

We’re asked about advising on shares regularly. More often than not, firms ask if this impacts upon their independence and whether they have or don’t have the relevant permissions.

So can you provide advice?

As indicated above, if you do provide advice it would be a personal recommendation, which is defined as:

… a recommendation:

(a) made to a person in their capacity as an investor or potential investor, or in their capacity as agent for an investor or a potential investor;

(b) which constitutes a recommendation to them to do any of the following (whether as principal or agent):

(i) buy, sell, subscribe for, exchange, redeem, hold or underwrite a particular investment which is a security, a structured deposit or a relevant investment (that is, any designated investment (other than a P2P agreement), funeral plan contract, pure protection contract, general insurance contract, right to or interests in a funeral plan contract or structured deposit); or

(ii) exercise or not exercise any right conferred by such a relevant investment to buy, sell, subscribe for, exchange or redeem such an investment;

(c) that is:

(i) presented as suitable for the person to whom it is made; or

(ii) based on a consideration of the circumstances of that person;

The list of designated investments includes ‘Share’ so advice on shares are definitely within the gamut of financial instrucments that advisers can advise on.

A cursory examination of most firms on the FCA Register reveals that under Arranging (bringing about deals) in investments, investment types includes: share.

So, yes, most firms can advise on individual shareholdings. But most firms do not! There are probably a couple of reasons for this.

The first reason might be that older advisers have ancient group memory of being able to advise on things called ‘packaged products’ under the FSA and its predecessor regulators including PIA, FIMBRA et al.

Jumping from the distant past to the present day, advisers are likely to avoid advising on shares because they a) are still traditionally focused on collective investments rather than individual shares and b) because a moment’s thought will bring the realisation that they are simply not in a position to advise on shares because they do not have ready access to relevant research nor the time to do it in any case.

Impact on independence

MiFIDII changed the definition of independence in 2018 but we still see disclosure documents that have not caught up with that. Much as it may seem odd, different levels of independence are possible now

‘Full’ independence

For firms/advisers to be independent in the broadest sense under MiFID II, their assessment of suitability must include a sufficient range of financial instruments, structured deposits and other retail investment products. The products must be sufficiently diverse in terms of type and provider to ensure that the client’s investment objectives can be suitably met.

When advising retail clients based in the UK, firms must be ‘in a position’ to advise on the full range of vehicles indicated above. However, for any particular client, there is no requirement to consider every product available on the market, only those that are relevant to the meeting the client’s investment objectives.

So, the range of products that ‘full independence’ firms are required to be ‘in a position to advise on*’ is as follows:

1. Markets in Financial Instruments Directive (MiFID) Financial Instruments
2. Transferable securities;
3. Money-market instruments;
4. Units in collective investment undertakings;
5. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to securities, currencies, interest rates or yields, or other derivatives instruments, financial indices or financial measures which may be settled physically or in cash;
6. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event);
7. Options, futures, swaps, and any other derivative contract relating to commodities that can be physically settled provided that they are traded on a regulated market and/or an MTF;
8. Options, futures, swaps, forwards and any other derivative contracts relating to commodities, that can be physically settled not otherwise mentioned in 6 and not being for commercial purposes, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are cleared and settled through recognised clearing houses or are subject to regular margin calls;
9. Derivative instruments for the transfer of credit risk;
10. Financial contracts for differences.
11. Options, futures, swaps, forward rate agreements and any other derivative contracts relating to climatic variables, freight rates, emission allowances or inflation rates or other official economic statistics that must be settled in cash or may be settled in cash at the option of one of the parties (otherwise than by reason of a default or other termination event), as well as any other derivative contracts relating to assets, rights, obligations, indices and measures not otherwise mentioned in this Section, which have the characteristics of other derivative financial instruments, having regard to whether, inter alia, they are traded on a regulated market or an MTF, are cleared and settled through recognised clearing houses or are subject to regular margin calls.
12. Structured deposits – and

1. Retail Investment Products
2. a life policy;
3. a unit;
4. a stakeholder pension scheme (including a group stakeholder pension scheme);
5. a personal pension scheme (including a group personal pension scheme);
6. an interest in an investment trust savings scheme;
7. a security in an investment trust;
8. any other designated investment which offers exposure to underlying financial assets, in a packaged form which modifies that exposure when compared with a direct holding in the financial asset;
9. a structured capital-at-risk product;

* Being ‘in a position to advise’ is more than just having the relevant permissions. Firms need to show that they have the appropriate processes in place, in particular research relating to the financial instruments in question. And advisers need to be demonstrably competent in the particular investments.

‘Focused’ independence

Under MiFID II, firms can be independent on a focused basis. The ‘focus’ could be on a particular type of product, e.g. Independent for pension products. It is likely that few firms will be able to, or want to, fulfil the ‘full’ independence criteria listed described above, i.e. being able to advise upon the full range of products under A, B and C.

Most firms are likely to continue as they were prior to MiFID II, namely advising on retail investment products – C – and adding in Structured Deposits – B – if a notification to this effect was sent to the FCA at the time MiFID II came into being.

Accordingly, such firms have to ensure that how they disclose/describe their independent status meets the MiFID II standard.