The Financial Services Authority (FSA) has discovered that nearly half of people who took advice from a financial adviser were unaware they were paying for the service.
In a survey of more than 2,000 people, the FSA found that 49% of financial advice customers or clients were unaware of the true cost of the commission payments made to their adviser after they had purchased a financial product.
Only 29% of consumers understood they would pay a fee or commission for financial advice.
33% of those who do not currently receive financial advice believed that the service was free.
These survey findings highlight the need for the new rules around remuneration transparency which are being introduced on 31st December.
From the end of this year, all financial advisers will have to agree an ‘adviser charge’ with their clients before providing advice.
This adviser charge replaces the existing system of commission on the majority of investment and pension products, although it can still be paid from the product.
Where do these existing levels of commission and fee ignorance come from? Surely by now consumers are aware that financial advice is never ‘free’ and always comes at a cost?
We believe there are several reasons for the survey results.
In the case of those individuals who do not currently receive advice, it is little surprise to hear that one third of them believe financial advice is free.
If they have never had the cost of advice properly explained by a financial adviser, then the current commission system can sometimes give the false impression that advice is somehow free – or at least paid for by a product provider.
Recent advertising by the Money Advice Service has also helped to perpetuate the ‘free advice’ myth.
It is those existing clients of financial advisers with the ‘advice is free’ belief that are more worrying.
The cost of advice should be properly explained by financial advisers at outset, and disclosed properly before advice is given and at the point a financial product is sold.
We have had robust rules around commission disclosure since 1995, so every consumer of a financial product should have been presented with a document explaining how much commission was being paid. Unfortunately, the mechanism behind the payment of this commission was not always so clear.
Independent financial advisers have been required to offer the option to pay a fee rather than receive commission for advice for several years. In some instances, we understand this has not been fairly presented, with the inference that commission was a ‘no cost’ option, compared to expensive fees.
Will the implementation of adviser charging on 31st December as part of the Retail Distribution Review go any way towards improving this situation and improving awareness of the cost of advice?
It might help in some instances, although we are already seeing examples of restricted salesforces replacing their existing commission model with a very similar looking adviser charging model, which will perpetuate the myth that advice is somehow ‘free’.
What savvy consumers will understand is that no business provides a commercial service free of charge.
Where an explicit cost is paid for advice, investors need to understand how this cost is paid and (most importantly) what value they receive in return for the cost.
Photo credit: Flickr/JonasPhoto
