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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

The 'free advice' myth is about to be exploded

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.

5 comments so far. Why not have your say?

Jim Dedicoat

Dec 21, 2012 at 12:14

The opening sentence says it all.

Same problems, why should people expect their current account banking to be free.

From people whom I know, I fear that the public will not go and pay the price for good advice, even when it can be so crucial, for their future.Times such as just prior to deciding what to do with the funding available to you as you retire.

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Donald Chan

Dec 21, 2012 at 12:55

Banking is different. The banks are borrowing your money and making a profit by lending it.

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Dec 21, 2012 at 13:00

JimD - People don't expect their current accounts to be free. They expect the banks not to absolutely cream them for inflated current account charges to help pay for their own mis-management of recent times. The government is letting it happen because that is the only way they stand a chance to recoup OUR money back from the banks to waste on something else they can claim credit for. As ALL the banks are at it there is little incentive to move.

Manage your assets carefully to let these b******* get as little benefit as possible.

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Anonymous 1 needed this 'off the record'

Dec 21, 2012 at 16:47

If 'The RDR will mean advisers will have to be more explicit, not more expensive,' were true then all those private banks and wealth managers changing their business models would be doing so unnecessarily and all the talk of the 'advice gap' would be wrong. The reality is that fees will go up, so that those with £100k-£500k will struggle to find quality advice at a price that makes sense. There will also be those clients who are discovering for the first time what they have been paying all these years and will decide, not without justification, that execution only brokers are worth a try.

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Dec 23, 2012 at 13:52

I can confirm that some people have no idea what they are paying.

On the 'Blog' of a well known financial website that I moniter, when the issue of (debatedly excessive) charges levied by a well known, popular fund providing paltform comes up, at least twice people have insisted they are charged nothing. It's amazing.

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