MSE News: Financial advice shake-up: what will you pay?

Former_MSE_Jamie

"A landmark shake-up takes effect today which will lead to most having to pay an upfront fee for investment advice..."

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Financial advice shake-up: what will you pay?

dunstonh

A landmark shake-up of the financial advice market takes effect today, meaning most consumers now have to pay an upfront fee for new investment and pension advice

That is not actually correct. The fee needs to be agreed in advance but can be paid over a period. e.g. someone seeking advice on starting a pension can have the fee taken over x months from the pension. It does not have to be paid up front.

The agreement has to be up front. Not the payment.

The Financial Services Authority (FSA) hopes the rules will stop advisers recommending deals which pay them the most commission.

Problem is that most investment contracts have been explicitly charged for at least 5 years with a good number being over a decade. Commission bias, whether real or perceived, hasnt been a factor for a long time.

The new regime won't make advice any more expensive. It changes how consumers pay, meaning they may need to fund the cost at the outset.

It will for some consumers. It will make it cheaper for others. The old system was priced on cross subsidy. Whilst early thinking was that RDR would prevent cross subsidy, this was later toned down. However, it has inevitably led to the creation of a minimum charge with most firms. So, those with small amounts are likely to see increased costs.

The changes will also see advisers needing to subscribe to a code of ethics, undergo at least 35 hours of training a year and hold a Statement of Professional Standing from an accredited body.

Dont read anything into that. Most advisers were doing far more than 35 hours a year. There was just no mandated figure. The rules set a minimum that is all.

Linda Woodall, head of investment intermediaries at the FSA, says: "These changes are about making the cost of advice clearer.

And that is effectively all it is doing. There are other minor changes being packaged with RDR but the key thing is that the fees will need to be agreed in advance and the firm itself is responsible for setting its own remuneration rather than the provider (although as mentioned, that has been the case for some time but not mandated to be).

For as much as things change, they stay the same. New names for things, a few paperwork changes but thats about it. Providers have replaced the commission page on their application with a fee page. The adviser states how much fee they want to take instead of how much "commission" they want to have. The RDR was thought up in the commission days. The industry moved faster to explicit charges (at least on the IFA side - the FA side was much slower in that respect and perhaps that is why so many FA distribution channels are closing as they failed to move and adapt in advance. Also FA firms were responsible for the majority of issues). RDR is effectively forcing those with lower standards to move up to the higher standards that the majority of (independent) firms were already working to. Those that were already at that level will see little change. A good thing but not quite a shake up as it would have been had it been introduced say a decade ago.

webmasterpolo

I concur, a pretty poor article.

Lot's of IFAs are now Restricted, but their service is identical. It's just a name change.

This article implies restricted advisers are all tied, when they aren't and is exactly the misinformation advisers are concerned about with the FSA lumping Whole of Market and Single Tied into one Restricted category.

For example: One company is Restricted and advise on everything except Occupational Pension Transfers and another is Restricted and advise on 3 Collectives and nothing else at all, it's not really a fair label.

If you wanted advise on say life cover or investing a lump sum, there is a huge difference between the two companies, but both are now called Restricted and the consumer has no idea what the difference is.

It makes it harder for the consumer to work out, which is against the very objective of RDR to help consumers.

-Web

Aegis

webmasterpolo wrote: »

I concur, a pretty poor article.

Lot's of IFAs are now Restricted, but their service is identical. It's just a name change.

I have to disagree on this one. Independence is an attitude towards the service offered, while restricted is excluding certain areas covered by the retail investment products label without consideration of specific client circumstances.

To give an example, a restricted firm would be one which excludes VCTs and EISs from consideration altogether. If a client comes along with a large annual income and wants to reduce their tax position, the restricted firm has to outsource to a third party or, worse yet, ignore the requirement and put something else into place (hopefully the former rather than the latter).

An independent firm might take the position that they consider VCTs and EISs to be unsuitable for the majority of clients due to their complexity and high risk nature, and might therefore conduct no central research on such products beyond a basic overview of their tax benefits and the qualifying requirements. However, when a client approaches them, the advisers of that firm have the ability to look into such products to determine whether they fit the requirements of that client.

Both firms might end up with the same outcome for a low-risk client, for example, but the starting position is vastly different. I genuinely don't buy the argument that advisers who choose to rule out certain types of investment from the very beginning are offering the same service as an independent firm. It doesn't take much more work to leave all of the retail investment product options open, just a bit of arguing with the FSA about decisions ultimately made.

This article implies restricted advisers are all tied, when they aren't and is exactly the misinformation advisers are concerned about with the FSA lumping Whole of Market and Single Tied into one Restricted category.

For example: One company is Restricted and advise on everything except Occupational Pension Transfers and another is Restricted and advise on 3 Collectives and nothing else at all, it's not really a fair label.

This I wholeheartedly agree with, and it has already led to problems. For example, the Solicitors Regulation Authority has recently demonstrated how this is a problem by allowing its member firms to refer clients to restricted advisers post RDR while previously insisting on independence. This opens the door to the firms you mention above, who might be nearly independent, but also to firms like St James' Place, who are tied to a handful of investment funds and a very limited panel of platforms and tax wrappers.

The Law Society spotted this issue and immediately put out a statement suggesting that solicitors who listened to the SRA on this one could find themselves in a lot of trouble later down the line if they refer to restricted firms and it turns out that their clients needed something that firm wasn't able to offer.

If you wanted advise on say life cover or investing a lump sum, there is a huge difference between the two companies, but both are now called Restricted and the consumer has no idea what the difference is.

It makes it harder for the consumer to work out, which is against the very objective of RDR to help consumers.

Agreed. At the very least it would have made sense to have a banded list of categories. Tied, multi-tied and independent was clunky and open to abuse, but it at least gave an indication of what was on offer.

Perhaps a series of tick boxes on the Terms of Business saying "we offer whole of market advice in the following areas" could be mandated to help, with categories like "insurance", "insurance-based investments", "investment platforms", "investment funds", etc, would make it clearer to consumers. The trouble with that, of course, is that it's always easy to gloss over the shortfall areas.

Ah well, RDR mk2 is bound to be on the horizon already!

grey_gym_sock

yes, the "restricted" label is muddying the waters. there is a world of difference between an advisor who can give independent advice on most areas and will refer you to another independent advisor to cover any area they can't, and an "advisor" who can only "advise" on a limited panel of products.

the latter should IMO not be allowed to call themselves an "advisor" at all. of course, nor should the "advisors" in banks.

Aegis

grey_gym_sock wrote: »

yes, the "restricted" label is muddying the waters. there is a world of difference between an advisor who can give independent advice on most areas and will refer you to another independent advisor to cover any area they can't, and an "advisor" who can only "advise" on a limited panel of products.

the latter should IMO not be allowed to call themselves an "advisor" at all. of course, nor should the "advisors" in banks.

Agree with you there. I don't agree with the concept of deliberately restricting yourself from certain retail investment products, however I can understand why some firms have chosen to do this. However, the idea of a salesman with a very limited fund range being able to refer to themselves as an adviser even after the early RDR suggestion that any advice not deemed to be independent would be termed "sales" and would be barred from using the adviser label is quite simply ridiculous. RDR was supposed to improve the quality of advice given, but on what was perhaps the most important issue of all, the FSA caved to lobbying.

webmasterpolo

Aegis wrote: »

I have to disagree on this one. Independence is an attitude towards the service offered, while restricted is excluding certain areas covered by the retail investment products label without consideration of specific client circumstances.

Attitude doesn't affect the regulatory definition though.

Hasn't there been some IFA firms that have always been excluding certain areas like VCTs and called themselves independent? Their service is the same now, but the FSA has removed the independent tag to replace it with restricted.

-Web

Aegis

webmasterpolo wrote: »

Attitude doesn't affect the regulatory definition though.

The attitude of the firm towards its investment research will directly affect the outcome of that research though.

Perhaps poor wording on my part, but I think the point is valid.

Hasn't there been some IFA firms that have always been excluding certain areas like VCTs and called themselves independent? Their service is the same now, but the FSA has removed the independent tag to replace it with restricted.

-Web

Quite possibly, and I believe they're right to do so. Even if a firm generally doesn't believe that such products usually match the requirements of their clients, to rule them out altogether at outset is not being independent, it's making an assumption about all of your clients which likely won't hold true in all cases.

dunstonh

Hasn't there been some IFA firms that have always been excluding certain areas like VCTs and called themselves independent? Their service is the same now, but the FSA has removed the independent tag to replace it with restricted.

Yes. I was one of them. It was a very common restriction with IFAs to avoid increased PI costs. Cant do that now and PI cover is likely to be high for the next year or two. If it shows signs of going down, I reckon most that are IFA now will still be then. If it increases or stays high after a few years, I suspect restricted will become more common.

missile

It seems we have two threads about this subject?

dunstonh

missile wrote: »

It seems we have two threads about this subject?

And neither of the articles they link to are much cop.