How changes to financial advice will affect you

Published:
09 November 2012
Topic:
News,Money,Savings

An old boss once told me, if you're writing about something complicated, try opening with a joke. So before we find out how the Retail Distribution Review will affect investors, try this 'My financial advisor made me a small fortune. All I had to do was give him a big one.'

Not quite Jimmy Carr, but it raises a smile because many people are wary of financial advisors, whether they're bank employees, insurance company staff or work in small firms on the high street.

The assumption is often that advisors are either out to line their own pocket or are no more capable of arranging financial affairs than someone armed with the stock market listings page, a blindfold and a pin.

The sector regulator, the Financial Services Authority (FSA), had a similarly jaded view way back in 2006, describing the market as 'broken'. Its solution is the aforementioned Review, known as RDR, which finally comes into full effect at the beginning of 2013.

So what changes will the RDR bring? And how will they affect you? Time for a Q&A...

What prompted the RDR?

There are many advisors who are dedicated to the clients' best interests and good at their jobs. But there's lots of justification for lingering unease that private investors have been poorly served on many occasions.

The mis-selling of endowments and personal pensions hit thousands of individuals, triggering millions of pounds of compensation claims.

Sales staff employed by banks or, directly or indirectly, by big insurance companies were flogging products purely because they generated the most commission.

The RDR is the regulator's attempt to clean up the advice sector, inject a strong dose of professionalism, and make it more oriented around the needs of consumers.

And that means?

No more commission payments, for a start. From now on you'll have to pay a set fee or negotiate an 'advisor charge' with your advisor, which will be paid out of your investment.

Hang on, I'll have to start paying for advice?

Advice has never been 'free'. If your advisor earned commission, it was still your money - you just weren't paying an explicit amount up front. And the commission on some policies was often equal to a year or more's worth of payments. On a £10,000 lump sum investment, up to £800 could disappear in commission.

But what about buying through my bank? No commission there, surely?

Oh yes, and plenty of it. Bank staff were heavily incentivised to sell the bank's own investment and insurance products, or those of the insurance company to which they were 'tied'. We've seen another glaring example of how this can work against consumer interests with the payment protection insurance mis-selling scandal, which is costing billions in compensation and shows no signs of abating.

So will banning commissions do the trick?

The RDR is all about transparency. You'll be able to see how much advice is costing, and you'll know the advisor's recommendations won't be influenced by anything other than your best interests.

But will it mean I get better advice?

Not necessarily - it's impossible to regulate against poor quality advice or errors of judgment. And it will always remain the case that investments can go down as well as up. But the RDR is striving to increase levels of competence by requiring advisors to pass a minimum level of qualifications and undertake continuing professional development.

So how much can I expect to pay?

It's difficult to be precise. Some firms will charge by the hour, others will negotiate a charge for a particular piece of work. The hourly rates will vary from firm to firm (as is the case with, say, solicitors), while competition could drive down the charges being quoted. What matters is that you'll get the pricing information at the offset, so you can decide whether you want to proceed.

If you opt for 'advisor charging' rather than a fee, the money will be deducted from the amount you invest, so at least you won't have to write out a separate cheque.

Wait a minute, does this mean I'll have to pay if I want to open a savings account?

No. You have to pay for advice on investment products, where the ultimate performance depends on a range of factors and isn't guaranteed. With a savings product, all that matters is the rate on offer, so there's no investment advice and thus no fee.

The same applies to mortgages, protection products (such as life insurance) and products such as motor and home insurance - they are not affected by the RDR.

Is there a way to choose between advisors?

As with any profession, there'll be good and bad. But a key technical difference under the RDR is between 'independent' and 'restricted' advice.

Oh dear, here we go with the jargon...

Bear with me, it's not too bad. An 'independent' advisor will consider all types of investment products that might be suitable from all the firms in the market. A 'restricted' advisor will only be able to advise on a limited number of products or providers - or maybe just the one provider they work for (such as a bank).

Again, the key point is that you'll be given the information upfront so you'll be equipped to decide.

You may find that your bank or building society will offer an 'information only' service on investment products, where there is no advice and no fee. But if you choose to buy, you will pay a commission, so the product isn't free. And because you acted without taking advice, you won't be able to complain if it turns out the product wasn't suitable.

Everything concerning the advisor's status should be in their marketing literature and advertisements.

Is one type better than the other?

Not necessarily. Both independent and restricted advisors will have to adhere to the same rules regarding qualifications, charging and ethical practice. An advisor may choose to be restricted to keep its operation costs down or because it is a specialist in, say, pensions, and doesn't need to keep in touch with other forms of investment.

From the end of 2012 all financial advisors will need to obtain (and show you) an annual Statement of Professional Standing (SPS). This confirms that they are suitably qualified, that they subscribe to a code of ethics and that they have kept their knowledge up-to-date through continuing professional development.

I already have an advisor...

If they haven't been in touch already, they should contact you soon to tell you about how their business will change from January, and what impact it will have.

If you have bought investment products already, you're probably paying 'renewal commission' to the advisor who sold them to you (sorry if that's news to you!). This could be 1.5% per annum of the value of your fund.

The RDR won't stop existing renewal commission payments but it will outlaw them on investments sold from 2013 onwards. Advisors will be allowed to charge a regular fee for ongoing service and take a charge if you are making regular payments into the future, such as an investment-backed life insurance policy with monthly premiums.

How will the RDR impact the investment market?

Some banks have decided that the RDR is too onerous and are simply going to provide information on the products they sell.

There is concern that many people - up to 5.5million, according to City firm Deloitte - could simply stop taking advice because they can't stomach the 'new' charges, previous commission payments notwithstanding. It could also be the case that the explicit cost of advice could effectively price some people out of the market.

We'll get a true sense of the impact in January and thereafter. Watch this space.

You can follow me on Twitter @KevinPrattMSM

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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Kevin Pratt

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