The Retail Distribution Review (RDR) being introduced on 31st December 2012 should result in a more professional financial advice sector.
Higher minimum standards of qualification, more transparent remuneration practices and clearer status disclosure are all ultimately beneficial for the end consumer.
We do however have some concerns that ‘old model’ behaviour might continue in 2013, at least for a time until the regulator identifies consumer detriment and takes action.
Here are a few things you might hear your IFA say next year (and what they really mean):
“New legislation means that I have to charge you £100 an hour”
A new client told one of our Financial Planners yesterday that his existing adviser said just this. Of course the new legislation, in the form of the Retail Distribution Review, means nothing of the sort.
The RDR does replace commission on retail investment products with adviser charging, agreed between adviser and client, and then either facilitated through a recommended product or paid directly by invoice.
What the RDR does not legislate for is a particular charging structure. Some advisers will choose to charge an hourly rate. Others, such as Informed Choice, will charge a project fee calculated based on factors including value and expertise.
Unless the fees being proposed by your financial adviser represent good value for what they are going to deliver, you should not accept them. They are certainly not being ‘forced’ to charge you fees at a particular level or in a certain way.
Blaming the FSA for the structure or level of fees suggests that your adviser does not have a particularly valuable proposition.
“Our advice will be amongst the most wide-ranging in the industry, with our team of experts researching and recommending products and providers based on meeting specific financial needs.”
The CEO of a large advisory firm said this in the press earlier this week, when announcing their decision to stop providing independent financial advice and move to a restricted advice model.
There will be many different shades of restricted advice in 2013, but restricted advice is never independent financial advice, despite the clever words used to describe the service.
If your financial adviser is saying anything other than “we provide independent financial advice”, they are not providing independent financial advice. This might or might not be seriously damaging to your financial well-being; in many cases it will be difficult to tell just how restricted the restricted advice might be.
“Our advice is ‘free'”
Advice will not be free in 2013. In fact, advice has never been free.
What advisers probably mean by ‘free’ is that they will be working on a speculative basis, in the hope they can charge you for implementing a product.
In the past, this meant working for ‘free’ with the aim of securing a commission. From the start of 2013, it means working for ‘free’ in the hope they can levy an ‘adviser charge’ on the implementation of a product.
If your adviser offers you ‘free’ advice in 2013, proceed with caution. It is more likely that the adviser will be recommending a financial product, when a financial product might not be required.
“You don’t need to take any action”
A strange quirk of the Retail Distribution Review means that your financial adviser might be biased towards inaction in 2013. This is because advice on existing investment products can result in fund based commission being stopped.
If your financial adviser tells you that you don’t need to take any action in respect of an existing investment, there is a chance this is because they are hoping to continue getting paid commission each year. As well as recommendations to take no action, providing no ongoing service can also have the same net result.
If your adviser is receiving remuneration each year – which is paid for out of the product charges you are paying – they should be providing an ongoing service. Demand this service or move to a new adviser; which coincidentally should also result in any fund based commission being switched off.
