/ Money

Is the future of financial advice on the right track?

The question of ‘trust’ in financial services has always been a sticky subject, and nowhere has this been more of an issue than with financial advisers. With new legislation on the horizon, will that trust return?

Poor financial advice can be devastating. Stories about mis-sold investments, such as Arch Cru, where 15,000 people lost out on thousands of pounds because they were told the highly risky investment was low-risk, are common.

But a new piece of legislation – the Retail Distribution Review – aims to stamp out bad practice.

As of next January, all independent financial advisers (IFA) will have to be qualified to a certain level and make sure the way their clients pay is transparent. But there are still concerns that the Retail Distribution Review isn’t the right plaster to fix the IFA industry.

For starters, many IFAs themselves have made it clear that they don’t want to undergo the changes enforced by the Retail Distribution Review. Many of them have dragged their heels over having to take exams and how they’ll be remunerated.

Compared with other countries like South Africa and Australia, where advisers have embraced regulatory change, many UK IFAs have made it clear they’d rather stick with the status quo than get a better deal for consumers. That’s not exactly heartening.

Restricted advice – solution or problem?

As my colleague Matt Woodington said in a previous Conversation on financial advice, the risk of less wealthy people getting priced out of advice is a very real one, as IFAs may choose to work with clients who can pay higher fees in the face of a commission ban.

The creation of a ‘restricted’ label, for IFAs who choose to advise on either just one area or will recommend products from a limited number of providers, has been touted by the industry as a solution to pricing out less wealthy clients.

Restricted advice can take two forms: some advisers will be restricted by advice type, like pensions, while some will be restricted by product type, e.g. just unit trusts. Their narrower focus means they will be less costly.

But restricted advice could leave us exactly where we started. Some of these advisers will essentially be salesmen selling a couple of providers’ products. Banks may step into the fold, but their history of advice has been chequered, to say the least.

And if restricted advisers are using a selection of providers rather than being whole-of-market, what way is there of checking on how they chose those providers? There’s still room for bias.

Are you a DIY investor?

So what’s the solution? We’ve talked about how Which? has been involved in developing a new British Standard for Financial Planning and Advice Services, which sets a framework for the delivery of financial advice and should give you the assurance that the adviser you’ve chosen meets a high benchmark.

There’s also the DIY option – using online tools to manage your own finances. But the concern that many of us may not know enough about investment risk remains pertinent.

Do you think the Retail Distribution Review will benefit consumers? Would you consider using a restricted adviser, or taking your finances into your own hands?


Just having a quick glance at this, and noticed

“As my colleague Matt Woodington said in a previous Conversaiton on financial advice,”

in the 7th para.

Well spotted, I’ve fixed that now Will. Thanks. What do you think about the future of financial advice? Plain sailing?

Well, I’ve only spent a short amount of time reading this and your RDR overview, and I based on that, I’m not getting a nice warm feeling.

I feel the main issue is down to the rates of commission paid by the various companies on the their numerous products. As regardless of the quality / ability of an IFA a fair few will only push products that pay them the most. And its hard to know just based on qualifications which advisor is better in that respect than any other.

What I didn’t see was a proposal for a fixed commission fee for all companies for each product type. That way you completely remove that from the selling equation.

And are there easily accessible and equally easy to understand league tables for perform for all companies and all products. Maybe the overseeing body should publish tables showing the top 10 in each category monthly that every IFA should use when explaining the various merits of one product/company over another.

The sad thing I find is that almost every company that offers a financial product is doing so as they can make money out of it, rather than for the benefit of the customer, so maybe profits on financial products should be capped.

And sorry but that was ony a very brief think on it, mustn’t miss Ms Ennis & co.

Allan Dodds says:
16 August 2012

I don’t believe it’s correct to say ‘UK advisers are resistant to RDR, whereas South African and Australian advisers embraced the change” – that’s overly simplistic and a bit sensationalist.

Full disclosure – I’m an IFA. I have been since 2000. I think that RDR is broadly a good thing, but there are – as with so many things – pros AND cons to this change. I feel that RDR is something of a sledgehammer to crack a walnut. Here is why:

1 – commission based and commission biased aren’t the same. We’ve worked on a commission model for many years. We always take the same 3% on new investments, regardless of what a provider offers. That removes bias. Any provider who pays more that 3% has that surplus rebated back to the client.

2 – where fees are the only option, little Mrs Miggins won’t be able to afford my hourly rate. Whilst she would have been able to absorb charges on a commission model, because the drag effect of commission is spread over a longer period, professional independent financial advice now becomes a bit elitist. I will do some pro bono work, but my employer still expects me to be a fee earner first and foremost. Oddly enough, I work for a solicitor practice, and the Law Society is trying to have them move away from hourly rates towards flat-fee work. I wonder how far behind that IFAs will be?

3 – “You know what you’re paying with fees” – remuneration disclosure has been mandatory since the mid-90s. Whilst the actual fee clients will pay will be very very overt from Jan 1 2013, just about every new investor has had commission income disclosed in suitability reports. The problem isn’t disclosure, it’s sales vs advice. The greedy/salesy IFAs take 7% because the providers offer it. The providers offer it because Mr Greedy IFA demands that they do so. And so on.

4 – The qualification minimum standards won’t weed out all the bad apples. I know plenty of IFAs who are good at ‘brain-dumping’ – they cram, pass their exams and then revert back to bad old habits. A bit like sitting the driving test. We need a better system of ongoing proficiency assessment, like medics or pilots, to ensure we are truly a profession and not an industry. There are those who have chosen not to attain the minimum Diploma level of qualification. They can’t call themselves Independent from 2013. Good riddance.

In reality, the only way to be sure you’re getting solid, professional financial advice is to shop around. The IFA-client relationship is essentially open ended, meaning you need to view it as a long term collaborative thing. Anyone who won’t commit to a service proposition, ie how often they’ll see you and what their reviews look like, or anyone who insists on charging for the first meeting, isn’t likely to be acting in your best interests going forward. Sales. Not advice.