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Better quality financial advice – but not for everyone

New rules governing independent financial advisers (IFAs) will radically change the way we pay for advice, and could result in thousands more making investment decisions unaided.

Better quality financial advice – but not for everyone

New rules governing independent financial advisers (IFAs) will radically change the way we pay for advice, and could result in thousands more making investment decisions unaided.

Major changes ahead

The Financial Services Authority's retail distribution review (RDR) is not something investors can afford to ignore. When the programme is fully implemented on 1 January 2013 it will fundamentally change the way we pay for and receive financial advice – and whether we get any advice at all.

The key change RDR will bring is that IFAs will have to sign an agreement with new and existing clients by 31 December 2012 on how they will be remunerated – commision, fees or a combination – and what services clients will receive. The idea is to make it clear to customers precisely what they are paying for advice. Once the new rule comes into effect commission will only be paid if a remuneration agreement is in place. 

The new code should have a number of benefits. First, it will create a clear distinction between truly independent advisers who can recommend any financial product and commission-based salespeople who only sell products from one provider or a limited panel of providers.  

Second, it will force advisers who want to call themselves IFAs to have proper qualifications and be accredited by an FSA-approved organisation. Third, the true price of advice should become clearer. Most important, it will go a long way towards removing ‘commission bias’, whereby an adviser has an incentive to recommend one product in preference to another because there is more commission attached.

Risks abound

The RDR is far from perfect and is not without risks. Many clients will baulk at paying fees for advice. The likely upshot is that good financial advice will become the preserve of the wealthy – and those who understand that fees can work out cheaper than commission.  

A charge of £250 for an hour’s advice on switching a pension policy may sound expensive. But if the sum being switched is £50,000 it is dramatically cheaper than a 3% upfront commission, which works out at £1,500 plus 0.5% a year commission. All those who either don’t want to pay fees or believe they can’t afford to will need to take a serious interest in their investments or they will find themselves at the mercy of salespeople.

The fear is that the number of independent advisers will dramatically fall and with reduced competition costs will rise. IFAs have argued for years that clients won’t pay fees, and many IFAs don’t want to switch to fee-charging because commission is worth more to them. Many have lost contact with a large number of their clients – although they still receive trail commission at the moment. This will end after December 2012 unless there is a remuneration agreement in place.

Unresolved issues

The full details of how the RDR will be implemented have yet to be decided. Lingering issues include how trail or legacy commissions wil be affected, the cost implications of platforms and fund supermarkets, and how a host of hidden charges will be treated. 

What, for example, will the RDR do about the hidden remuneration earned by IFAs who pay the lower wholesale price for units when they purchase in bulk on behalf of clients, but book out the units to the individual at slightly higher prices, pocketing the difference. 

Unfortunately, although reform is very badly needed, there will be a host of unintended consequences which may not benefit consumers. Those providers, life companies for example, with big legacy business claim customers will suffer if they are forced to close legacy products to new contributions. There is no doubt that in the current economic climate an enforced switch to a new product might result in a client who is already disgruntled with their investments discontinue contributions altogether. 

The situation is complicated further because the FSA has said it will not ban legacy commission on group personal pensions. Where is the logic in that? Group personal pensions are simply a package made up of individual personal pensions.

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4 comments so far. Why not have your say?

David Gibson

Sep 30, 2011 at 09:23

Whilst you make some valid points your commission vs fee charge comparison is misleading - presumably a 3% upfront fee with 0.5% ongoing fee would include the initial advice on the switch and the implementation of the switch and the ongoing fee would be levied to monitor and review the client's pension planning. The £250 hour's charge is purely advice on switching and does not cover implementing a switch and monitoring it on an ongoing basis - I don't know of any firm who would advise on, implement and review a pension switch (of all things!) for £250 all in. Please use like for like comparisons in future...

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Vyvyan Toms

Sep 30, 2011 at 18:14

Is pre-existing trail really going to be stopped?

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jeremy moore

Sep 30, 2011 at 20:04

financial advisors !

no better than estate agents.


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Richard Church

Oct 01, 2011 at 06:01

David Gibson's is so correct and one could go further in that not all IFA's would take the 'maximum' 3% plus 0.5% p.a. This is always negotiable. As regards J Moore's comments it depends on the IFA, Estate Agent, Banker, Supermarket, Builder, Spouse etc. - in fact anyone or body one 'deals' with.....its a matter of choosing the right one. It does seem however that the RDR might force a good many 'right ones' to become unavailable to the majority. Also, as I have mentioned before, fees are VATable whilst commission is not..... so there's another 20% to pay but I am sure that will help the country's debt situation - who has a vested interest in pushing through the RDR proposals?

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