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The way you get financial advice is changing

Sign saying advice

The way we go about getting financial advice is changing to make sure consumers get a fair deal. Linda Woodall, head of investments at the Financial Services Authority, explains what this will mean for you.

Making decisions about our pensions or investments can have long-term implications. So it’s vital that we can trust the people giving us advice to do the best job possible.

This is already the case for many of us but unfortunately the system hasn’t always worked. It hasn’t always been clear how you paid for financial advice. And there was always the chance you’d be sold a product that earned your adviser the most money, but wasn’t necessarily right for you.

We’re bringing in changes on 31 December 2012 that mean you’ll see clearer charging structures, clearer services and better professional standards when dealing with your adviser. We’re making the following improvements, which mean you will:

1. Agree with your adviser how much you pay

As we’ve been reminding customers, financial advice has never been free. This has come as a surprise to some people who weren’t fully aware of the commission they were paying on their investments.

Advisers will no longer be paid by commission but will instead have to agree with you upfront how much their advice will cost. Crucially, this change shouldn’t affect how much advice costs. And rather than paying the fee upfront, you may be able to agree with your adviser to have their fee taken from your investment.

Advisers are free to set their own rates. If you currently have an adviser or are thinking about using one, ask them about the way they intend to charge for their services and consider shopping around.

Advisers can continue to receive commission’ for advice they’ve previously given. This is known as ‘trail commission’ and means the adviser will continue to be paid commission on products sold before 31 December 2012. To understand more, ask your adviser or product provider what commission arrangements are currently in place.

2. Know what service you’re paying for

Our second change means you’ll know what type of investments your adviser can help with, as they’ll have to explain to you whether they’re offering ‘independent’ or ‘restricted’ advice.

Advisers offering independent advice will be able to consider all possible investment options that may suit your needs. They can also look at financial products from all firms across the market. However, an adviser offering restricted advice will consider specific types of products, product providers or both.

3. Get improved professional standards

There are many places for us all to invest our money. For some it can, understandably, be confusing to keep up with all the latest developments. Therefore, when seeking help from a financial adviser, you want to know they have the expertise to advise you.

Our final change means advisers will have to meet the higher qualification standards we set, keep their market knowledge up to date and sign an agreement that requires them to treat you fairly. We’ll be checking firms to make sure they stick to these new standards.

All in all, we’re modernising how advisers work, raising standards and ensuring that they treat their customers fairly. Will our changes increase your trust in financial advisers?

Which? Conversation provides guest spots to external contributors. This is from Linda Woodall, head of investments at the Financial Services Authority. All opinions expressed here are Linda’s own, not necessarily those of Which?.

Alan Higham says:
27 December 2012

What this article does not make clear is that there are two different forms of “advice” that exist in the financial services world. The FSA regulates those two different types of “advice” in very different ways.

Type 1 advice: this is where you get help with choosing a financial product. This might include being given the rates available for a financial product; answers to factual questions such as “What is an ISA?” or “What is an annuity?”; and many similar pieces of useful information. In this situation; the customer is responsible for the choice of product. The “adviser” is responsible for making sure there is sufficient information provided to the consumer to make an informed decision. the amount of information and guidance provided can very much feel like advice.

The article above talking about all the changes coming in on 31 December 2012 does not apply to this type of advice.

Type 2 advice; includes type 1 advice but importantly results in a personal recommendation for a product type or product manufacturer that is suitable for the customer. The adviser takes responsibility for the decision made. If the decision is flawed then the adviser has to put it right if they have made some mistake.Type 1 advice has no such recommendation.

Advisers who give type 2 advice have to comply with all these new rules.

The result is that many advisers are moving to providing type 1 advice as it is requires no professional qualification; it is cheaper thus more profitable and involves taking less risk on. Type 1 advisers can also continue to take a commission thus presenting the service as being “free” to the customer thus it is easier to sell to consumers.

The FSA have allowed these two standards to exist alongside each other with very different rules and customer protection because they believe that the customer will understand the difference between the two and will make an informed choice as to which service they prefer.

I have yet to see any newspaper or trade journal or consumer body or the FSA explain these facts to consumers. I doubt very much whether consumers do understand the difference between the two types of advice and the different protections/rules involved.


As usual, the finance industry is keeping a little mystery about what they do.

But that aside, I can honestly say that ALL advice I have ever been given by Financial Advisers has turned out to be poor. The investments have either lost money or turned out to be worse than cash savings in a modest building society account. And this includes the time before any tax saving schemes (Tessa’s and Isa’s).
My next problem is that I will soon have to buy an annuity with one of my “professionally advised” investments – my private pension. Yes, I know that I got tax relief on the payments, but the growth of the fund has been quite poor with annual charges taking 1.5%. And then to cap it off just look at the derisory income that an annuity provider will actually cough up. I calculated (using a spreadsheet) that I could make my lump sum last for over 30 years just by using cash savings accounts to generate interest, yet the annuity providers will only give you about 5% each year. So you need to live until 85 to break even NOT including growth of the capital over this period. The banks and insurance companies are making a bomb out of this.
Recently, they have made the press by saying that the over 50’s are not making provision for their retirement. WRONG. The over 50’s have wised up to this big rip-off and are holding on to their money in different ways that still allows them to get hold of it rather than locking it away for the benefit of the insurance companies.

Alan Higham says:
28 December 2012

I sympathise with Jeff. People coming up to retirement now are suffering from the financial crisis over the last 5 years.

I wanted to emphasize the importance of shopping around for financial products.

1.5% per annum is too much to be paying for charges on a pension. You should be able to reduce that down to no more than 0.75%. If you are 5 years away from retirement then the saving in charges can add up.

When you come to buy an annuity there is on average 25% difference in value between the best annuity and the annuity offered by your own pension company.

Annuities are effectively guaranteeing a 3% per annum investment return after charges for life. They used to pay more but in the face of the current economic situation they are broadly the same as over 15 year gilts issued by the UK Government.

No-one has to buy an annuity any more. It is probably sensible to buy one before age 75 (or earlier if your health is poorer than the average person of your age) but you are not compelled to.

There are other options. Drawing an income whilst investing in cash is one but interest rates are below 2% at the moment and so unless annuity rates fall in the next 5 years (which they might do) then a cash investment could see you lose relative to an annuity.

Lastly, don’t underestimate your lifespan. Most people do; men do so by the biggest amount. A man in good health aged 65 living here on the Isle of Wight can expect to live past age 90.

It is always worth taking advice at retirement from a proper financial adviser who specialises in this area. You will be charged for advice through a commission loading in the annuity rate so you may as well use that money with someone you trust is competent. If you don’t then the insurance company you buy the annuity from will keep the commission as extra profit or they may even pay it to the adviser that set up your policy in the first place.



I started investing for retirement at age 29. This was a managed product that would mature in 25 years and give me cash to start my plan of retirement. It matured in mid 2008 and gave me less than 3% compound growth. Had it matured in 2009, then it would have made zero growth after 25 years. In both cases I would have made more by saving cash. So when FA’s tell me that the markets are for the long term, it is absolutely meaningless as it all depends on what happens when products like I had mature.


I have taken advice from different advisers, yet no product has performed anything like they said it would.


I have 2 DC schemes. The one that I took out in 1995 has the 1.5% annual charge, but does seem to have better growth than some others. The other DC scheme is a company scheme from when I got redundancy 2 years ago which has had its management charge recently increased as the employer group benefit has eroded. So yes, maybe I need to revisit these.


I am well aware of this.


3% is farcical when you consider that they still retain your capital.


I believe that people with smaller pots can’t avoid annuities. Am I correct?


Yes, interest rates are low, but you split up your cash into a range of fixed term interest accounts, leaving enough for 1 year in instant access. And if you need the capital, you can still get at it, albeit with some delay.


So you admit that my 30 year calculation for using cash rather than an annuity at state pension age is a better option.


This can only be done at the time of needing to get the income.

BUT what annoys me more is that when I was made redundant 2 years ago at the age of 56, I drew on my deferred DB pension for an income (which I had to do before my earlier shift pay aged off and eroded my final salary), took a lump sum from this and when added onto my savings and redundancy money, I worked out that this would give me a decent (but frugal) lifestyle until I became 65, and my wife became 54 and a few months; at which time the state pension would start and keep this lifestyle. Then last year Cameron and his half-wits added 7 months onto my age and 20 months onto my wife’s age before any state pension AFTER I had made these arrangements at age 56. The Tories (and their LibDem lapdogs) should not have altered pension age for anyone over 55 as they might have already retired like I did.


For some reason Alan Higham’s comments were supposed to be listed above, but have been deleted in my reply.

Please read my comments above as they are replies to each of Alan’s paragraphs (apart from my last comment – rant???).


Oh, and i made a typo with my wife’s pension age. It was due to be at age 64 and a few months – sorry!

Gordon says:
28 December 2012

We did get good advice from a Financial adviser – he was honest and didn’t stick to the products preferred by his bank who advertised themselves as giving advice that wasn’t tied to any group. The adviser who didn’t like being told to sell products that weren’t the best for his clients, was suspended on trumped up charges and when he was eventually completely cleared he wasn’t allowed to deal with his old customers. That company no longer exists. When will they learn that honesty is the best policy. Financial institutions still don’t seem to have learnt that simple lesson.

[This comment has been edited to meet our commenting guidelines. Thanks, Mods team]

ThomMorgan83 says:
29 December 2012

This is the best Which? can do? A superficial, promotional piece by a Head of the farcical FSA? Which? supplies no analysis or critique? What’s the point of supporting this consumer advocacy with monthly subs, I could be watching the equally empty BBC.


Hi Thom, thanks for your comment. From time to time, guest writers appear on Which? Conversation to kickstart a debate in their area of expertise. In this instance, we were grateful to have a representative from the regulator to contribute to the debate on financial advice. Which? has published its on comprehensive guidance on the changes here – http://www.which.co.uk/money/tax/guides/financial-advice-explained/.

Overall, Which? is very supportive of the changes to financial advice, and contributed to many of the consultations during the five year period leading up to the changes. Too many consumers have fallen foul of poor financial advice, where products were recommended based on how much they might earn for the adviser and not whether or not they were suitable. The move to make fees for advice more transparent, ban commission and increase adviser qualifications are designed to deliver better outcomes, and value for money, for people that take financial advice.

Alan Higham says:
29 December 2012

I’m just answering the points Jeff made.

Is a 3% per annum return farcical? It is certainly disappointing. There is a very decent chance that inflation will be more than 3% so it may well be a negative real return. The return is artificially held down by QE. So there is a strong temptation to stay in cash for say 5 years and watch what happens when QE unwinds. Of course, when and how QE unwinds is totally unknown. I would say it is likely that annuity rates will rise when it does happen but it isn’t certain to.

I totally agree with you on the State pension changes Jeff. It was very unfair on those who are now having to pay a pric

The problem with waiting say 5 years from age 65 to age 70 before buying an annuity is that you lose the income in the meantime. Let me explain by a worked example. I’m looking at a man living in Ryde IOW age 65 in good health with £50,000 pension fund that he is going to buy an annuity with.

Today he can secure £2,718 p.a. Let us assume he can earn 2% interest on his savings after all charges. If he was age 70 now then £50,000 would secure an income of £3136.

Assume now that annuity rates stay unchanged in the next 5 years. In deferring the annuity until age 70, the man would have to live to 94 to be better off.

If though annuity rates improved by 10% then he would only have to live until age 85 to be better off. As I mentioned earlier, his life expectancy is just past age 90. To be better off before his expected date of death then annuity rates need only improve by 3%.

The problem facing many people in the last few years is that they have put off buying an annuity hoping rates would get better and they have become much worse. If rates were to fall by 10% then you would have to live to 132 to break even!! At age 90, you would have lost £11,500 or around 20% of your fund.

All I’m trying to say is that putting money in cash keeps the capital safe but you are quite exposed to what happens to annuity rates and thus the secure income you can take. I think they are much more likely to go up than down. If you can afford to wait for a few years before taking your pension, I’d say at least 5 years, and you can afford to lose 20% of your fund without it affecting your standard of living to an unacceptable level, then it is a gamble worth considering.

People with smaller funds aren’t forced to buy annuities by any law. When people see the cost of running a pension they can find that the extra administration costs mean an annuity looks better value on a smaller fund. Anyone with total pensions under £18,000 can take their whole fund as cash, less an income tax charge, once they are over aged 60. You can take 2 pots of £2000 or less as a lump sum regardless of your total pension fund size.

All that the 3% p.a and age 90 calculation shows is that the annuity price reflects the guaranteed investment return in the market on government bonds and the expected lifetime of the man concerned. If you are happy to accept the risk that your income could rise as well as fall then don’t buy an annuity and keep the money invested. You will still find your income limited to roughly what an annuity will buy you and your income will be reviewed every three years. It may go down by more than you imagine. My general rule of thumb is only do this if taking 80% of maximum allowed income is sufficient. If you need to take more than 80% then make sure the risks of income falling are fully explored and that you are happy to fall back on other assets if the worst happened.


Haven’t got much time right now for a full discussion, but I would just like to comment on the 3%. Without any interest this will last 33 years!!!!!
However with 2% interest you have only used 1% in your first year and very slightly more in the second year and so on. Haven’t got time to write a spreadsheet but I guess that 50 years wouldn’t be far off.
But you don’t put all your capital in a 2% account because you don’t need instant access to it. Take 5% in the first year and the remainder will make at least 3.5% (and currently more) so you’ve only used 1.5% but you’ve got 5% income. This is the RIP-OFF that insurance companies are getting fat on. (OK, there is the potential problem of tax on interest but I avoid this by using cash ISA’s and putting money in my wife’s accounts).

Just one other point: I don’t see how:
“putting money in cash keeps the capital safe but you are quite exposed to what happens to annuity rates and thus the secure income you can take”.
With cash you are making so much more than in an annuity, that annuity rates would have to rise dramatically. I just can’t envisage this happening.

BUT the overall lesson is that you really can’t plan retirement income as politics and economics will always have the potential to thwart the best of plans. That is why a good pot of cash is best as you stay in control and be able to access it for emergencies.