Why is commission being banned?
Many advisors lived on commission from selling products – and some products (and providers) paid more commission than others. So there was a temptation for less ethical advisors to recommend products and providers on the basis of what they could earn rather than what best-suited the interests of their customer.
Scandals such as personal pensions and endowments mis-selling were linked directly to commission earnings. The FSA wants to avoid such problems in the future.
So I’ll end up paying more for financial products?
Not necessarily – but the way you pay will change. From now on you'll have to pay a set fee to the advisor or you’ll have to negotiate an 'advisor charge'. If you opt for an advisor charge 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.
When it comes to the level of fees and charges, advisors charge different amounts. Some will have an hourly fee (ranging from around £75 to £250) while others will quote a ‘project’ fee for completing a particular task. When commission was legal, it 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.
It will be up to advisors to justify their charges. Which brings us onto the two types of advisor now in operation…
Oh-oh... is this where things get complicated?
A little… Thanks to the changes, there will be two types of advice: 'independent' and 'restricted'.
Yep, but it's not too bad. Independent advisors consider all types of suitable investment products from all the firms in the market. Restricted advisors only advise on a limited number of products or providers - or maybe just the one provider they work for (such as a bank).
So, a pension specialist might be ‘restricted’ because it only deals with one type of product – but as far as that product goes, it could consider every firm in the relevant portion of the market.
Again, the key point is that you'll be given the information upfront so you'll be equipped to decide. Everything concerning the advisor's status should be in their marketing literature and advertisements.
All financial advisors must show you a Statement of Professional Standing, which is updated annually. 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.
So that’s all I need to know?
Er, not quite. You could find that your bank or building society is now offering an 'information only' service on investment products, where there is no advice and no fee to pay.
Here, if you choose to buy, you will pay a commission, so the product certainly 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 for you.
What about my existing investments?
If you have bought investment products already, you're probably paying 'renewal commission' to the advisor who sold them 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.
Does all this change mean I will now get better advice?
It’s odds-on that there will still be instances of poor quality advice or errors of judgment by advisors. And even when the advice is good, it will always be 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 the objective is to create a more professional advice sector that has a transparent charging structure. As 2013 unfolds, we’ll see whether that becomes a reality.
Follow Kevin 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.