Investors dumping IFAs by the bucket load

Rollinghome

Clearly there is a difficulty for the IFA industry which it will have to resolve.

In the past, most IFAs earned their living by selling financial products for the product providers for which they were paid very substantial sales commission - typically 3% or more upfront for an investment plus 33% of the ongoing annual management charge as "trail commission".

The product providers clearly didn't pay them to give "advice". They paid them for the self-interested purpose of selling their products. Any useful advice that may have been provided was therefore normally only subsidiary to gaining a sale, in the same way as advice might be given by a shop assistant or any other salesperson.

Now all that has substantially changed. The regulators had been unhappy with the way that those seeking advice were in most cases subjected to a sales process with the resulting high costs and, as a result from January this year, product providers were banned from paying IFAs commission or other inducements for selling investments. The commission still paid on existing investments will gradually disappear.

So IFAs remaining in the industry have been provided with a challenge. It is now illegal for the people who once paid the majority of their wages for selling their products to do so. Soon their only source of income should be from actually providing advice and the FCA is determined that the fees charged for advice should be clear to the client.

If IFAs expect to continue in business then their client wills need to be persuaded that the quality of their advice is of a far higher standard than in the past and worth the cost. If that doesn't happen then I've no doubt that the move to online providers such as Hargreaves Lansdown and perhaps others providing guidance rather than full advice will only accelerate.

This new world has already been recognised by some small IFA firms such as Informed Choice who have introduced their own new DIY service as well as the big boys such as Charles Stanley.

For those corner shop IFAs who can't come to terms with the effect of regulatory changes, and of more changes to come, and think they can continue charging clients as much as they were formerly being paid to sell investments, for the same low quality advice, then the future may not be rosy.

I think that'll be a pity. There are people who do find saving and investing confusing who need advice but that must be good advice reflecting their best interests, not those of the adviser himself, and at an appropriate cost, not at a price that's so high that's it's self-defeating. That's the challenge IFAs will now need to meet.

As more people move towards managing their own investments we should also be ensuring that companies such as Hargreaves Lansdown are more firmly regulated and not allowed to operate against the public interest resulting in a bigger problem than we had before.

PS. The article seems to have been moved to http://www.telegraph.co.uk/finance/personalfinance/investing/10233801/Ive-ditched-my-adviser-now-I-use-a-low-cost-broker.html

jem16

Rollinghome wrote: »

I think that'll be a pity. There are people who do find saving and investing confusing who need advice but that must be good advice reflecting their best interests, not those of the adviser himself, and at an appropriate cost, not at a price that's so high that's it's self-defeating. That's the challenge IFAs will now need to meet.

Like every industry there will be "bad apples" where the quality of the service is not as it should be. However I feel, on the whole, that the majority of IFAs, especially those small companies in business for themselves and therefore liable for themselves, genuinely put the interests of their clients to the fore.

However we also have to remember that they are running a business where certain costs such as software, overheads and liability insurance etc have to be met, otherwise the IFA would go out of business. Prior to RDR and under the commission system, many clients with low amounts to invest were being subsidised by higher wealth clients. Many also thought the advice came "free".

This will no longer happen and advice pitched at an appropriate cost, will be too high for those with less to invest. Some will feel that any cost is too high as it was "free" before. Most of these people would be better served, cost wise, with FAs from banks. However most banks have pulled their advisory service leaving these people with nowhere to go except for DIY.

This I feel is the real pity of RDR. Advice from an IFA will only be cost effective from both adviser and client point of view if you have £100k or over. I'm not sure that this is necessarily what the regulator had in mind.

atush

I agree, smaller investors will possibly be worse off as they now have no where to go for advice and are more likely to make big mistakes, or worse keep all their funds in cash.

And the regulators with all their degrees and high salaries should have put a bit more thought into what would happen.

dunstonh

And the regulators with all their degrees and high salaries should have put a bit more thought into what would happen.

The FSA acknowledged it was likely to be an outcome long before it happened.

In reality, post RDR fee based via IFAs is typically cheaper than commission based bank products pre RDR. So, in all probability, even though the amount may seem higher, its probably cheaper than it used to be. They just didnt see it before.

fairleads

Archi_Bald wrote: »

No - just wanted some facts. Thanks for providing the URL, it adds a bit more meat to the debate.

Notably though, the article doesn't offer any help to people who are looking for ideas and/or guidance about successful investing. Neither does this thread.

What do you suggest I do as a virgin investor

• with no starting capital, at the age of 23, with no family, an annual income of £21K, no health problems, no debts, but with plans to emigrate?
  Cash
• with £100K starting capital, small income from a pension, still working part time, at the age of 65?
  At this age we should have a plan of our own
• with £5K starting capital, male, recently divorced, paying maintenance for 3 kids, age of 39, probably facing redundancy, a couple of small company pension funds?
  Cash
• etc

Will you give me your name, address and FSCS registration number so that I can verify that you are authorised to give financial advice?

If you don't want to give advice, what do you suggest people do when they want help with their investment decisions?

Hope that helps

Archi_Bald

fairleads wrote: »

Hope that helps

fairleads wrote: »

At this age we should have a plan of our own

You are funny.

There's plenty of people who never had a penny in their life but then make an inheritance in their sixties that's easily £100K. They never had any 'plan of their own'. What are they to do with their new-found riches?

BTW, I noticed you didn't give me your name, address and FSCS registration number so that I can verify that you are authorised to give financial advice.

planteria

dunstonh wrote: »

In reality, post RDR fee based via IFAs is typically cheaper than commission based bank products pre RDR. So, in all probability, even though the amount may seem higher, its probably cheaper than it used to be. They just didnt see it before.

agreed. i think people knew that they were being charged before, but just factored it in. when it is an itemised cost, which is fair, honest & open, i think it is putting a lot of people off. i can see that it shouldn't, but it still will.

gadgetmind

bigfreddiel wrote: »

thats because engineering is far more complex than finance

Designing cars (and parts thereof) is engineering, whereas fixing cars is the job for a mechanic or technician. And as with everything, all can be as complex as you like!

I pick and choose.

My Audi had a minor engine fault that lit the light and put an error in the logs. The main dealer would have changed both intake manifolds and charged £1600. I replaced some linkages and did the job for less than £50 in a couple of hours.

It it needs a new exhaust, then I'd much rather someone with a lift get filthy rather than me.

Ditto with financial matters. I know enough to know both what I can do myself and when I'm better off paying someone with the breadth of knowledge to work on things with me.

Ignorance is not bliss, and never has been, but outright arrogance is if anything worse.

gadgetmind

dunstonh wrote: »

So, in all probability, even though the amount may seem higher, its probably cheaper than it used to be.

Agreed, which is why I mostly approve of the changes even though they will probably be mildly detrimental to a DIY investor such as myself.

atush

planteria wrote: »

agreed. i think people knew that they were being charged before, but just factored it in. when it is an itemised cost, which is fair, honest & open, i think it is putting a lot of people off. i can see that it shouldn't, but it still will.

I agree, seeing it in black and white even though cheaper than before (and is it truly if they were being subsidized by high net worth clients) seems to be putting people off who either stay all in cash and lose out out inflation/shortfall or put it all one one Ftse tracker.