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The 'free advice' myth is about to be exploded
Why do nearly half of people taking advice think it's free?
by Michelle McGagh on Dec 21, 2012 at 09:49
Everyone knows there’s no such thing as a free lunch, so why do so many people still think they do not have to pay for financial advice?
A survey by the Financial Services Authority (FSA) shows it's Brits currently taking advice – and paying for it – who are most likely to think it’s free.
Nearly half, 49%, of people currently taking advice believe they are not being charged for the service. Of people who are looking to take advice in the future, 35% think it is free. Of people who would never consider taking advice, just 30% believe it is free.
It is worrying that people who are already paying for advice think the adviser is helping them out of the goodness of their heart. Advice is not free and never has been.
You could be forgiven for thinking it is, though, as advice has typically been paid for via commission. This commission is paid to the financial adviser from the product that you pay in to, and the money used to pay the adviser is yours.
Most people are unaware that this transaction takes place even though their money is being used to pay the adviser. This is because there were no rules around what costs the adviser should explicitly disclose to you, and many advisers were happy to let you carry on thinking you were getting free advice while they took a big fat commission.
This led to all sorts of mis-selling because some advisers, not all, have been motivated by how much commission they receive rather than what product is most suitable.
This 'smoke and mirrors' commission operation is about the change. In the new year the FSA’s new retail distribution review (RDR) rules come into force, and advisers will have to disclose just how much they charge and what you get for that money.
There have been cries that it will mean financial advice will be more expensive for consumer, but the truth is the charges won’t change – only the way of disclosing them so you know exactly what your money is paying for.
From 2013 advisers will have to charge a fee but this doesn’t necessarily mean writing a cheque, the fee can be paid from the product (much like commission) but it will have to be agreed upon first – there will be no ‘free advice’ trickery.
The RDR will mean advisers will have to be more explicit, not more expensive, in their prices and it will hopefully explode the free advice myth once and for all.
More about this:
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- The Citywire Money guide to the RDR savings revolution
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