A good financial adviser can help you get the most from your money, protect your loved ones and plan for the future. This advice comes at a cost, currently most of this is not as transparent as it could be, so changes are being made to make these costs more visible and clearer to the consumer. These changes come out of the Retail Distribution Review (RDR) carried out by the Financial Services Authority and take effect from 31st December 2012
So what are the changes?
You will know how much advice will cost
Financial advice has never been free. Historically, if you purchased a product, investment or otherwise, through a financial adviser they would be paid commission by the product provider on that sale. This commission is normally a percentage of the annual premium or lump sum invested and can range from 1% to 8% for an investment lump sum. So investing £20,000 could produce a commission payment of as much as £1,600 to the financial adviser.
From 31st December 2012 instead of paying commission your adviser will have to clearly explain how much advice will cost and discuss with the customer the best method of payment. This could be an upfront fee or a deduction from any lump sum invested and will ensure that the advice you receive is not influenced by the amount of commission being paid to your adviser.
You will know what you are paying for
You will have the choice between two types of financial advice, 'independent' and 'restricted'.
- An independent financial adviser can offer advice on all types of investment from all product providers across the market
- An adviser offering restricted advice can only consider certain products from one, or a limited number, of product providers
All advisers will have to clearly explain what they can advise you on
You will get improved professional standards
Some products are complex and difficult to understand so the minimum professional standards that an adviser has to meet are being increased to ensure their knowledge is up to date.
So are these changes good news?
Well yes and no really. Obviously making the cost of financial advice clearer has got to be a good thing but these changes may affect, adversely, customers on lower incomes who are unable to pay explicitly for advice. Add to this that high street banks (well those who are not closing their financial advice operations) will be offering only restricted advice with no fees, so lower income customers may be driven towards this end of the market and miss out on independent financial advice. But the RDR is certainly good news for those DIY investors among you, as explained here.
There are also concerns that customers will still be bemused by the different types of adviser available - independent, restricted one product provider, restricted limited range of product provider, restricted limited product range etc.
Also the way RDR is being implemented is not straight forward. For example commission payments won't disappear from existence. The RDR does not impact on all financial products, life insurance for example is not included. Also existing business and investments will remain unaffected until you review them. So ongoing trail commission will still be paid from investments if they were taken out before 31st December 2012. In addition execution only sales, i.e. where you buy financial products or investments without advice, also do not fall under the RDR.
Confused? I'm not surprised. For more information please read the FSA's consumer guide to RDR.
But despite the niggles I'm convinced RDR is a good thing. As the dust settles on these changes customers will hopefully understand both the different levels of advice and the cost involved. Maybe financial advisers will now join the ranks of solicitors and accountants and be respected for their professional knowledge and advice. But they will now have to show the value that their services add for clients to warrant explicit charging, and that is a skill the industry has not had to possess until now.