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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

How to find a good financial adviser after RDR

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.

What’s changing?

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.

Qualifications

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.

Hourly charge

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.

Percentage charge

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.

Fixed fee

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.

If you want to cast your net wider then the most well-known adviser search tool is Unbiased.co.uk but you could also try VouchedFor.co.uk where clients can review and rate their IFA.

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'

19 comments so far. Why not have your say?

JD

Dec 12, 2012 at 15:19

Once again the link betwen 'tied' and 'restricted' is being overstated. Under the new regime, an adviser can and will be restricted if a choice has been made to specialise in a particular area of advice, which might be pension drawdown, inheritance tax planning or investment management to name but three. In my opinion, there is every possibility that advice on such specific areas might well be superior from a 'restricted' adviser due to their specialist knowledge and experience compared with that available from an 'independent' financial planner. If it wasn't such an obvious cliche I'd talk abut GPs and specialists in the medical field. There, I've done it. It depends what advice is being sought as to whether 'restricted' or 'independent' will be better, but it is surely time to stop this lazy attitude to 'restricted' advice.

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Keith Cobby

Dec 12, 2012 at 15:54

The medical analogy is a good one. The public will not understand or care about the 'independent' or 'restricted' label. Either they will like what is on offer or they will walk.

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Headmaster

Dec 12, 2012 at 17:52

"If you want to cast your net wider then the most well-known adviser search tool is Unbiased.co.uk. However, it lists all IFAs, regardless of whether they will meet the FSA's criteria"

Its a farse, you need to pay Unbiased to be on their site. They do not show all IFA's. Totally misleading and it has been for years.

Is anything done about it? No. Does the FSA do anything about it? No.

A Total efin farse.

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Rob Walker

Dec 12, 2012 at 18:03

There isn't any difference in finding a good Financial Adviser or a good Carpenter, Plumber or whatever. Decide what you want one for then do a bit of research / ask around to find an appropriate one. Most investment options are fairly dull and if you want advice rather than 'Tips' then a suitably qualified one ought to meet the bill. Historically the problem has been clients sounding off on how good or bad their own Adviser has been based on the value of that individuals' investments. If your Adviser is a whizz-kid at beating the market, why is he still in a crummy office talking to jerks like you?

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Michael Stevens

Dec 12, 2012 at 19:30

Unbiased does not list all advisers, only those that have paid to join, unless it is now free.

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Technispark

Dec 12, 2012 at 21:51

I had no idea that they could currently be so under qualified ! No wonder I have been so unimpressed and make my own decisions!

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Greg Thomas

Dec 12, 2012 at 22:12

I agree with Rob. A good carpenter or plumber can be recognised by his tailgating you 2 feet from your back bumper in his white Transit van. If an IFA does that in his Bentley; hire him!

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Jimlad

Dec 12, 2012 at 22:39

The key to this change - which took the FSA three years to produce - is the comment "...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" If this change is to benefit the consumer, the insurance and investment groups should reduce their charges, because they will now be relieved of the need to provide for adviser remuneration. But will they? Just don't hold your breath! The FSA did not even consider this aspect, which shows that the FSA is a tool of the government, against a group of people who have insufficient political clout to resist it. The probability is that the FSA will recruit a few dozen more compliance officers at 6-figure salaries to enforce the new rules.

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Rob Simpson

Dec 13, 2012 at 00:05

How can restricted advice ever be better than independent?

Restricted by product provider means that you might not pay the cheapest premium for your life cover.

Resticted by advice area means that you are advised to take life cover when you actually didn't need it becuase you had £1m invested but your adviser doesn't give investment advice.

The advisers banging the drum about retricted being best should really be saying that restircted advice is cheaper and simpler for them to deliver.

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Asim Macci

Dec 13, 2012 at 05:24

Its important for advisers to provide products/solutions that specifically cater to their clients, if they can do this by being "restricted" (dependent on product range) then its ok, otherwise they should go "independent".

The best way for advisers to charge (both for clients and themselves) is to charge annual retainers. Therefore the client pays a one-off annual fee for advice/research/reviews etc. Advisers could stagger their retainer model to include more levels of service, this way if the client wants more they pay more & its one off. Some clients need more time with advisers but will still receive the same product as others, therefore why should they pay more?

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Michael M

Dec 13, 2012 at 13:30

The rich can afford RDR, the less wealthy/poor, will simply look at the upfront fees and walk away or go down a cheaper route.

The proof will be in the pudding and we must wait to see how many of those people who have been willing to go down the commission route will now actually be prepared to pay for the products?

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Karen Barrett @unbiased.co.uk

Dec 13, 2012 at 14:27

Hi, Karen from unbiased.co.uk here. I feel the need to set the record straight regarding our search.

We list all advisers on our search who wish to be on it - currently there are over 20,000. There is a tick box that sets the default to those who are paying for the enhanced service to be shown, but we are clear that this box can be unchecked for a full list of the best matching advisers. It costs us money to run the service we do generating PR, advertising on search engines and generally generating traffic to the site and as a not-for-profit organisation we feel it fair that those who are paying towards the service should benefit most from the leads we generate.

The article is inaccurate in stating ‘it lists all IFAs, regardless of whether they will meet the FSA's criteria. Our tip is to click the 'fees or commission' option and on qualifications pick category B, where it is shown, to maximise your chance of selecting a good firm”. We have our own criteria for listing on our site which states advisers must offer a fee option to consumers, offer whole of market advice and are authorised to transact investment business. We verify all advisers listed against the FSA data at least weekly. We have verified over 33,000 qualifications held by the advisers listed. If the FSA could tell us who they considered an IFA we would be happy to check against this too but to my knowledge they do not hold this information. There is no ‘B’ category on qualifications – we list qualifications by product area.

There is no commission payment options on our site for financial advisers. This has been changed to other fee type options ahead of RDR when we relaunched our site at the beginning of November.

Consumers can now select an adviser on a whole raft of criteria – quals, specialist areas, location, accreditation, BS and ISO, SOLLA membership, gender of adviser, size of pension / mortgage or investment – the list goes on. The aim is that as we hold all these data we want consumers to be able to refine by whatever is important to them so that they feel happy to meet you guys and get advice. We also want to help you showcase why your firm is different and attractive to potential clients. I cannot reassure you enough that the team here at unbiased really does care about making consumers understand the benefits of taking advice and we work hard to get those consumers to use our search and meet an adviser.

Thanks for taking the time to read. Karen

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TA

Dec 13, 2012 at 19:28

@Greg Thomas – so you reckon if you see an IFA driving a Bentley you should hire him? Interesting logic as where do you think his money came from to buy the Bentley? Yes, that's right, it would be his clients. And do reasonably wealthy “know it alls” like to pay Bentley fees to their adviser? You guessed right, no they don’t. A bit of a daft thing to say isn’t it?

@Rob Walker – so its the IFAs job to “beat the market” and if they consistently do so why would they be “advising jerks...”? Ever known a fund manager who always beat the market? Only a half wit will say they can do so and have it as part of their service proposition.

An IFA is an adviser first and money manager second. It is not their job to beat markets. It is their job to give advice on what is best to do and how to invest it in the most cost effective way. If they subsequently have to refer it to some “expert” then so be it.

As for the Restricted vs. IFA and Medical analogy that's a funny one.

So I have a pensions need, I must see a pensions specialist as it is my only investment right? And its advice will have no effect on other areas of my financial plan? It’s like going to see an Oncologist who says he knows little else in how the treatment will affect my health hereon. That's why it all goes through the GP first. Who can't understand that simple concept?

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Rightcharlie1

Dec 15, 2012 at 09:11

Good old England, becoming more like America everyday in so far as treating people as if they are stupid. Do you know Yanks aren't stupid, it's their education and culture that makes them appear that way. And the financial services sector is playing the same game with Brits. The comment above regarding reduced product fees from providers is valid, but of course their already planned response will be "we have been subsidising thes costs on behalf of Joe public, for years we have absorbed them, so now we will leave these exactly the same but we no longer subsidise the punter." Complete tosh. Just like when it became official for a vendor to offer reduced price for cash transactions. What happened? The retailers argued they had been subsidising the credit card charge on behalf of the consumer. My *rse. So in effect, any one who paid cash was penalised to the value of the credit charge. And it wil happen again, good old Blightey!! Hhmm, I've got a headache, I wish I was American!!!!!!

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Rob Walker

Dec 15, 2012 at 10:53

TA...the point I was making was exactly the opposite to your interpretation ie some misguided clients evaluate their FA based on how their investments have performed instead of how good the advice has been and that if an FA was brilliant at beating the market, he wouldn't waste his time as an FA advising clients!

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Robert Grampian

Dec 28, 2012 at 14:15

Please let me know to which first year honours course you refer.

Honours courses are in the later years of a degree and not in first year as you imply.

Perhaps the standard may be equivalent to a first year university degree course though any comparison is surely crude in any case.

Some advisers already boast of the "degree equivalency" of their qualifications.

The comparison of school Higher(Scotland) and A-levels with first year university courses remains inspite of years of analysis still highly contentious.

Please advise.Thank you.

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Colston Hicks

Jan 01, 2013 at 14:51

Payment should be made for results not advice. If at the end of a year a fund had increased by £10,000.00 an adviser could be sent a cheque for, say, 10% of the increase = £1,000.00.

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Ian Hazell

Jan 04, 2013 at 08:40

Just an aside to Robert Grampian's comments: I am beginning to see job adverts stating in the qualifications required things like "Pre 1980 A levels or a post 1980 first degree" Shows what employers think of the current standards in our schools! Also our company used to recruit at 2 good GCSE passes in maths & a science subject, now we need A level passes to get candidates with the same level of understanding.

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Michael M

Jan 04, 2013 at 09:59

Ian - many employers, not just the current ones, have been saying this for years, but still the education system pumps out youngsters, many of whom are ill equipped to enter into the world of work.

The recession has simply focused the minds of employers and they are getting tough on all applicants, which in the long run can only (hopefully) mean a better educated workforce.

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