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How to find a good financial adviser after RDR
The rules for financial advisers are changing as a result of the 'retail distribution review' by the Financial Services Authority. Here is our guide of what is happening.
by Michelle McGagh on Dec 12, 2012 at 13:32
Financial advice is getting a big shake-up in the New Year from a set of sweeping reforms brought in by the Financial Services Authority (FSA), the City watchdog.
The FSA hopes the changes, which are the result of a six-year 'retail distribution review', will improve the quality of financial advice given to the public and make it clear to people what they are paying for when they use a financial adviser.
There are three main changes that the RDR reforms will usher in at the end of this month.
Commission is replaced by 'adviser charging'
Historically, the vast majority of advisers were paid commission by pension and investment providers each time they recommended one of their products. Although it was a good way of paying advisers, the commission system raised a question mark over who advisers were really working for: their clients or the product provider? There was always the suspicion that advisers were biased in favour of recommending products that paid them the most commission.
The commission system also misled the public into thinking financial advice was free, because they did not have to pay for it directly. Of course, consumers did pay for financial advice as product providers recouped the cost of commission through higher charges on their plans and policies.
From 31 December 2012 commission payments will be banned. Advisers will no longer be able to take the payment from the product automatically, and instead must spell out all charges and fees to you explicitly under ‘adviser charging’ rules. Adviser charging may sound like an additional cost but it’s not – it's a transparent way of setting out the cost of advice the consumer has always paid. There is more on this further down the article.
Independence and the status of financial advisers
In the old system, advisers fell into three categories: independent, multi-tied and tied.
- Independent meant an adviser was supposed to look at the whole of the financial market before recommending an investment or pension plan – these advisers were known as independent financial advisers (IFAs).
- Multi-tied advisers could only choose investments and products from a list picked by their employer.
- Similarly, tied advisers only offered advice on products and investments from their employer’s range. For example, most bank advisers are tied or multi-tied.
These categories are changing as a result of RDR. The term independent remains, but multi-tied and tied advice will be renamed 'restricted' advice. A new, simplified advice category is being added.
- IFAs will have to comply with a broader definition of the 'whole of market' to remain independent. For example, if they are advising someone about investments they will have to demonstrate that they considered investment trusts and exchange traded funds, which weren't widely recommended by IFAs because they didn't pay commission.
- Restricted advisers is the new category for tied advisers and IFAs who do not wish to broaden their range of expertise.
- Simplified advice. At the moment no company has figured out how to provide simplified advice, which says a lot about the financial services industry. There are hopes that some companies will find a way to offer a low-cost way, basic advice service.
Previously financial advisers only had to hold a certificate in financial planning, the equivalent of a GCSE, to ply their trade. From 31 December 2012 this minimum level will be raised to the equivalent of a first year of a university honours degree course.
And it will not be enough to just take the exams: advisers have to prove they are undertaking continuous professional development to a certain level each year.
In practice, the best financial advisers have gone beyond the minimum threshold. The highest qualifications advisers can hold are certified financial planner and chartered financial planner, awarded by the Institute of Financial Planning and Chartered Insurance Institute respectively. These are the equivalent of a full degree, and the chartered and certified designations have become an unofficial benchmark for advisers who want to show their professionalism.
It is not just individuals who can become chartered or certified, whole companies can gain these accreditations. Advisers have to meet certain standards for their company to be accredited as certified or chartered.
Different charging methods
All advisers will have to spell out all their charges to you, but this doesn’t mean they all charge in the same way.
Some IFAs have followed accountants and charge a fee-per hour. The rate of the fee depends on the adviser, as there are no minimum or maximum rates. Most IFAs who charge this way have time-cost sheets that show how much time was spent on each piece of work.
- Pro: it’s easy to calculate what you owe, and time-cost sheets offer peace of mind that your adviser isn't pulling the number of hours worked out of thin air.
- Con: knowing that you are paying by the hour could make you are more prone to clock watching rather than listening to what the adviser has to say.
This is the most common charging method used by IFAs and often takes the form of 'three plus a half', which is what many advisers earned under commission, ie, 3% of the money you have to invest and a further 0.5% a year for keeping you updated on how your financial plan is doing.
- Pro: if the IFA wants to retain your business, they will have to justify that 0.5% annual charge by making you some money.
- Con: if you have a lot of investments with an adviser you may feel you are paying over the odds for the service.
This is why charging a fixed fee for work is becoming increasingly popular with advisers who want to be as open as possible.
Advisers usually charge from a menu of fees. For example, there will be a set price for setting out a financial plan, another cost for investing your money, and a separate fee for transferring pensions.
- Pro: with a fixed fee you know exactly what service your adviser is going to produce for you and exactly what it is going to cost. That means it is easy to judge whether you think the adviser is good value for money or not.
- Con: as the fee is not linked to how well your investments do, you’ll still owe the same amount if they fall dramatically. You also have no idea how much time you are paying for or how much time the adviser has put into your financial plan.
Charge from the product
From 31 December 2012 advisers will only be able to take their fees from money you have invested if these costs are explicitly laid out and agreed with you.
- Pro: taking the adviser charge from the money you are investing has the big advantage that you don't have to write a cheque for the advice.
- Con: of course it means there is less money to be invested.
Always ask your adviser to explain how they charge, whether it's in the form of a cheque or a payment out of the pot of money they are advising you on.
Can your adviser prove they are professional?
Currently, the only way of checking an adviser is legitimate is to look them up on the FSA register, but this still doesn’t tell you whether the adviser is a member of a professional body or if they are well qualified.
This will all change from 31 December 2012, when statements of professional standing are introduced. This is a certificate issued by a professional body and states that the adviser has not only reached the minimum standard of qualification but is completing regular continuous professional development.
Very importantly, an adviser who has the certificate has also promised to adhere to a code of ethics, usually set out by the issuing professional body, but the FSA is currently drawing up its own code.
From 31 December advisers will not be able to practise without a statement of professional standing, so they should be able to provide you evidence of it.
IFA search tools
There are a few online IFA search tools. Your first port of call should be our very own Adviser Finder tool which can help you find a well-qualified, professional financial planner in your area.
The Institute of Financial Planning and the Chartered Insurance Institute also both have their own free adviser search tools where you can find advisers who are certified or chartered financial planners.
For more information see 'The Citywire Money Guide to the RDR Revolution'
More about this:
More from us
- Never trust an IFA? Why advice is undervalued
- Understanding IFA fees: a simple guide
- Banks suspend advisers as RDR deadline looms
- Lords claim RDR reforms will widen 'advice gap'
- Financial advice: how much are you paying?
- From £50 to £2,500: huge variation in financial advice fees exposed
- Why the 'retail distribution review' is good for you
- Will we miss commission-biased financial advisers?
- The Citywire Money guide to the RDR savings revolution
- FSA register
- Adviser Finder
- Institute of Financial Planning
- Chartered Insurance Institute
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