Informed Choice chartered financial planner and managing director Martin Bamford was quoted in The Telegraph on Saturday, in an article describing some changes to the regulation of financial advice.
On 31st December, the Retail Distribution Review (RDR) comes into force for all financial advisers in the UK.
This will result in three key changes to the provision of financial advice; a higher standard of professional qualifications and behaviour, more transparent adviser remuneration, and clearer distinctions between independent and other types of financial advice.
We believe that these new rules will, on balance, result in better outcomes for investors.
Because all financial advisers will need to be qualified to a higher standard than the current rules require, better technical knowledge and understanding should be demonstrated. This is likely to result in advisers being more able to understand the risks involved with various products and consequently recommend the most suitable.
More transparent adviser remuneration should help to reduce the number of instances where advisers are motivated to sell certain products as a result of commission. Instead, advisers will have to agree their remuneration with investors before any advice is given.
Advisers can still work for ‘free’, on a contingent charging basis where they only get paid if they implement a financial product, although we believe this approach will become increasingly rare in the future.
Investors will continue to be able to pay adviser charges from pension and investment products, but these charges cannot be funded from future product charges. This is because ‘indemnity’ commission is being abolished on 31st December.
On clearer distinctions between types of advisers, the requirements for offering independent financial advice will be slightly tougher. Any advisers who do not meet these higher standards will instead provide ‘restricted’ advice, with the nature of these restrictions differing between advisers.
Whilst these regulatory changes will inevitably result in some investors being unable to access independent financial advice in the future, we do not believe they will mean advice becomes anymore expensive or less accessible for the majority of investors who already benefit from advice.
Financial advice has never been free, although some commission structures have aided some advisers in giving that impression.
The investor always pays for financial advice; either directly in response to an invoice from the adviser, with a direct deduction from their financial product or through future product charges which fund the payment of commission.
All the Retail Distribution Review does in respect of adviser charging is make it very clear what is being paid and how it is being paid.
In fact, we can see circumstances where the cost of advice will start to fall, because cross-subsidy between investors should be removed once the right amount is charged to each investor for delivering advice.
Our experience of adviser charging since 2004 has been it is possible to charge individual investors a fair amount for advice, implementation and review services, which is reflective of the value they receive, rather than the commission levels determined by a product provider.
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