Here at Informed Choice, we have been broadly supportive of the Retail Distribution Review.
Since its implementation on 31st December, it has achieved an increase in minimum standards of professional qualifications, greater transparency over remuneration and clarity of status disclosure for independent financial advice.
Those are the good points.
Unfortunately, the Retail Distribution Review (RDR) also contains an enigma or two.
One fundamental flaw in the RDR was its treatment of trail or fund based commission. When investments were recommended before 31st December, these ongoing payments to advisers can continue.
Trail commission – which is typically paid at the rate of 0.5% of the value of the investment each year – continues to be paid under the new RDR rules until any action such as fund switching is recommended by the adviser.
This can result in some advisers having the incentive to do nothing. By taking no action, advisers could stand to profit from their inaction.
This issue was addressed during a BBC Money Box programme on Saturday, with presenter Paul Lewis asking whether investors were aware of their advisers receiving this trail commission.
The guest financial adviser explained that there are no rules to force its disclosure on a regular basis.
If you have any investments in place which were set-up by a financial adviser before 31st December 2012, you need to do two things.
Firstly, check to see if the adviser is receiving any trail commission from your investments. If they are, they should be in a position to tell you how much.
Secondly, make sure you are receiving an ongoing service which represents good value in return for these payments.
It is unfortunate that some financial advisers seem to view trail commission as a form of deferred initial remuneration for recommending investments. A very few consider trail commission to be money for old rope.
This should never be the case.
As an investor, you have a right to receive an ongoing service for the money you pay out of investment charges each year.
Depending on the amount you pay, this ongoing service might include a comprehensive annual review report and a meeting with your financial adviser to review progress.
Depending on the type of investment policy and the provider, it might be possible to stop your old financial adviser receiving any future trail commission.
This can be as easy as transferring servicing rights for the policy to a new financial adviser, such as Informed Choice, which provides a comprehensive ongoing review service to every client.
Photo credit: Flickr/Shoestring Photos
