Changes to financial advice come into force
The changes aim to improve the quality of advice, reduce mis-selling and, in the longer term, improve the level of consumer confidence and build general levels of trust in advisers.
Advice has never been free – but this hasn’t always been made clear. The FSA says that it is important that people understand that advice comes at a cost and what that cost is. At the moment, the cost of advice is often obscured in the price of the product and people are not aware how much their investment advice is really costing them.
The FSA has banned commission payments from product providers to advisers. Advisers will have to clearly explain to the customer upfront how much advice will cost and how the customer will pay for it. This will ensure that the advice advisers give will be in the best interests of the customer, not driven by how much commission they could earn.
The FSA is making sure that advisers are competent by raising the minimum professional standard and by making sure that advisers undertake regular training to keep their knowledge of the products in the market up to date.
Advisers will need to subscribe to a code of ethics, hold an appropriate qualification, carry out at least 35 hours of continuing professional development a year and hold a Statement of Professional Standing from an accredited body.
Financial advisers will have to clearly describe their services as either ‘independent’ or ‘restricted’. Advisers that provide ‘independent’ advice will be able to consider all types of retail investment products which could meet the customer’s needs and consider products from all firms across the market.
A ‘restricted’ adviser will only be able to recommend certain products, product providers, or both. This means they might only offer products from one company, or just one type of product.
Linda Woodall, head of investment intermediaries, FSA said: “The changes will improve customer confidence – we want people to feel that they are getting a service from their financial adviser that is relevant to their circumstances and in their best interests.
“These changes are about making the cost of advice clearer, where else would you buy something without knowing in advance how much it costs? Customers will now know how much advice is costing them, the service that they are receiving and be reassured that their adviser is qualified.”
Chris Douglas of financial planning consultants, Douglas White, said: “In the long term, the Retail Distribution Review will result in better advice overall. However, in the short term, consumers should expect a bumpy ride.
“RDR is a seismic change but it will not be felt on 1 January 2013. Advisers that have sinned won’t turn into saints overnight.
“There are still too many firms and advisers who have not changed at all, or where they have changed, these changes have been for their own benefit.
“A typical example would be those firms who now offer passive-only solutions, with a hefty 1% annual advice fee on top, or those who still intend to charge clients different amounts based on the chosen/recommended tax wrapper.
“For many IFAs, their primary RDR goal has been cosmetic, namely to meet the required qualification level by the 31 December. They have given very little consideration as to what will add value for their clients going forward.
“I certainly expect to see a rise in DIY investors, as some people won’t be able to afford the fees or will have been put off by the barrage of negative stories surrounding financial advice in the media. The DIY route can work for some, but for others it can be very dangerous.
“A lot of people will have a great plan to do their own financial planning but then life gets in the way. The reviews don’t happen, the ‘sells’ don’t happen and very quickly it can be a mess.
“Having a list of 100 funds to buy is a good thing. Knowing which ones to mix together for your own goals and timescales, when to rebalance and when to sell only happens via advice.
“Some firms are looking at restricting their offerings because they don’t see how they will be able to be profitable offering independent advice.
“The advice market will definitely contract but over time what will remain will hopefully be more consistent and higher quality advice.
“One problem is that, to date, RDR has been almost exclusively concentrated on the advice side. Very little meaningful information has been produced for consumers, which is a pity.
“A check of the FSA register will immediately confirm whether an adviser has the required qualifications, but consumers should have been given more information about what to expect and what to ask.
“In the brave new world of RDR, consumers should challenge advisers before engaging with them and they should never feel pressured into taking advice if they have not received the right answers to their questions.”