Advisers will have to be more trustworthy
You won’t be misinformed because of commissions after 2013
THE financial regulator, the Financial Services Authority (FSA), is shaking up the way financial advice is being provided in the UK. New rules – the Retail Distribution Review, or RDR for short – come into force on 1 January 2013.
The new rules incorporate three new requirements. In my view, all three are fundamentally positive for consumers.
Firstly, the minimum education bar for financial advisers is being raised. Customers seeking advice will deal with better-educated advisers, which can only be a positive outcome.
Secondly, advisers will have to declare very clearly whether they offer “independent” (i.e. whole-of-market) advice, or “restricted” advice (anything that isn’t whole-of-market). While a similar distinction has been made in the past, the new rules go further in terms of clarity. Again, this can only be a good thing.
Thirdly, provider commission payments are being banned for investments. Instead of being paid by providers (e.g. insurance companies) for selling their products, advisers will have to agree their remuneration directly with their clients. This is perhaps the most important change and definitely the most misunderstood.
These changes don’t come a moment too soon. Financial advice in the UK has something of an image problem. Lots of people I speak to have had poor or mediocre experiences with financial advisers in the past. The poor calibre of advisers has been part of the complaint, but the biggest criticism is reserved for the commission regime that is being replaced.
Under the new rules, the FSA is recognising these issues and is making bold steps to improve the perception of financial advice.
By banning commission payments, the FSA is attempting to remove a potential bias in advice. In the past, different providers and different products have often paid different levels of commission. This introduces incentives that have been at the heart of numerous mis-selling scandals.
Under the new rules, the FSA wants to ensure an adviser will act as the agent of the client, not the product provider. And that is a very important distinction when it comes to an adviser-client relationship.
However, moving to fees doesn’t necessarily mean paying more for advice. The new rules simply encourage greater transparency and less bias in what consumers have already been paying.
Furthermore, a fee for advice can take a number of forms: it could be a flat fee, an hourly fee, a fee based on a percentage of assets or a combination of the above. Advisers are taking different approaches, so it makes sense to shop around.
Fees also don’t necessarily have to be paid upfront. In most cases, it is relatively easy to have an adviser fee paid from the investment itself. In fact, in some circumstances it is positively tax-efficient to do so (e.g. fees for advice on a pension transfer should come out of the pension pot, rather than a client’s after-tax savings).
Yet the new rules haven’t been without their detractors.
The new rules are undoubtedly challenging for advisers. Firstly, advisers are being asked to pass several exams – which I can confirm are not easy. A lot of experienced advisers are questioning whether the exams are worth the cost and effort and are considering early retirement.
Secondly, advisers are having to revamp their service proposition so that they can charge an appropriate fee for the work and value they deliver.
Yet charging a fee has been complicated by the fact that in the past advice has often been misconstrued as “free” (and advisers have sometimes compounded this by trying to present their advice as effectively “free”).
Financial advice has never been free, since a commission paid by a provider and a fee paid by a client one way or another both come from the client’s same pocket.
If a lot of advisers do leave the industry as predicted, financial advice may become harder to find and more expensive. However, there is a lot of ongoing disagreement about whether advisers are indeed leaving and whether the cost of advice is rising, falling or broadly staying the same.
Notwithstanding the challenges, consumers will benefit significantly under the new rules, and by extension advisers stand to benefit from far greater client trust and loyalty in the long run.
Ben Smaje is managing director of Kennedy Black Wealth Management.