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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.

You can put your pension fund into a self invested personal pension SIPP which allows you to draw down an amount up to 120% of what an annuity pays, and you retain control of the capital.

Find a good financial adviser who charges a fee, not commission. We have one who has worked well for us. But you cannot expect someone to work for you for nothing – either pay someone or do it yourself with the risks involved.

Cash is protected? Not with inflation – it’s value goes down each year. Part invested in blue chip shares should protect your investment and produce dividends that beat inflation. But nothing is risk free. If it were there would be no financial advisers – they’d all be multi-millionaires living in the sun.

So unless you have the knowledge you’ll need professional help to make the most of your money. Just find the right help.

Alan Higham says:
31 December 2012

Hi Jeff

The annuity is giving you c. 3% per annum underlying investment return. You also join the “annuity club”. Each year you survive, you get a benefit from those members who do not. The value of this credit is worth around 0.5% each year in your 60s but it rises quite quickly to over 2% each year in your 70s. That is the main reason why buying an annuity before age 75 is usually the best thing to do if your main concern is your personal income security.

Cash interest rates in a SIPP are about 2% at best, they may even be lower now. Please show me where you can get 3.5% in a SIPP after the SIPP charges.

Cash earns 2% and the annuity is earning 3.5% including the “annuity club value” between 65 and 70. So annuity rates have to improve to make up the difference. They probably will do at some point in the next 5-10 years. But it isn’t certain that they will; hence my suggestion that you give yourself a 20% safety margin.

The SIPP allows you to drawdown a maximum income each year set according to gilt yields in force at the time your policy is reviewed (every three years). At the moment a man aged 65 on 1 January 2013 would be able to take a maximum of £2750 per annum income from his £50,000 SIPP. The limit is about to be increased by 20% but the law hasn’t yet come into force.

I agree with the point made about cash not protecting the capital from inflation. Investing in equities when the cap on your maximum income is set by reference to gilt yields introduces a big risk that your maximum allowable income might fall. People who went into drawdown in 2007 and having their reviews now are finding that their maximum income level is reduced by as much as 50%.

It is also about how risk-averse you are, or need to be. A SIPP invested in stocks, shares and other lower risk investments requires an acceptance of some risk that the total value will fall, but should perform if properly managed. It can produce near 5% after charges, and the fund remains yours, and your heirs (after rather punitive tax) – a perceived downside of an annuity where you lose what remains.
Why invest a SIPP solely in cash?

Jeff says:
1 January 2013

Why all this talk about SIPP’s? I’ve never mentioned them. I am talking about cash. Real cash. And yes, you can still get right now a decent interest rate if you tie up your cash for periods of years. This 2% that you mention is for instant access. I currently have one instant access account at 2.75%, one at 2.30% and one that is currently 2.7%, but set to drop to 2.0% next month. The rest is tied up in fixed accounts for up to 5 years at much better rates.
Also, any income from an annuity will for most people be taxed at 20% and this cannot be avoided (unlike cash in ISA’s or savings in my wife’s name – she has no other income at all). So the 3% is only worth 2.4%.

And your example of 3.5% annuity is still poor value. The capital alone would last for 28 years!

As for the markets, I again repeat that in the past my long term managed investments have performed very badly as you can’t predict what things will be like when either they mature, or you need to get some cash out.

Jeff, SIPPs have been raised because they are an alternative to an annuity.
Cash? It is not the interest rate only that matters, but the difference between it and inflation. So currently you need to earn 2.7% (CPI) to 3.0%(RPI) (or 3.4 to 3.7% if you pay tax) just to stand still.
Long term, a sensible portfolio of shares have performed well if you reinvest dividends, but are unreliable if you need to cash all in at a particular time. You may have been badly advised. The choice of an IFA is crucial, it seems to me, unless you are an expert yourself.

Jeff says:
2 January 2013

These are exactly my points.
I don’t pay tax on interest as I have stated above, and spread the cash in short and long term accounts so I am ahead of inflation.
I do have some shares spread over 3 types of business and yes, DRIP works well .

But annuities remain bad value. As you point out, if you need your cash at a particular time, (give or take a few years if you have a back-up of cash or shares) this is why you have an annuity and it can fail you dramatically. The only ones who benefit are the insurance companies who effectively gamble that you will die sooner rather than later.

I say again, currently annuities are a rip-off and I can forsee that as more and more people realise this the uptake of personal pensions will continue to fall. The industry has let us down.

Jeff says:
2 January 2013

And as for IFA’s, I think that mine gave me good honest advice at the time (between 1982 and 1995). IFA’s can’t predict what will happen to any long term investment due to changes in legislation or events like the 2008 crash.
Even in 2006 and 2007, which IFA’s stopped selling investments and told people to hold off until the markets dropped in 2008 so that they could buy in at a low level? None, because they couldn’t predict events even that short time ahead. And even if they did know (which I don’t believe many did) why would they stop advising and cut off their income flow? I don’t think that many people would have paid for advice to not buy any investments for a few years – they wanted to invest, so the IFA would advise them to invest in something, hopefully cash at that time, but I doubt it.

Same as the weather. Pundits are predicting what the weather will be like for 2013. But the reality is that nobody knows. This time last year no-one predicted the amount of rainfall that we had in 2012.

It is all a gamble.

Alan Higham says:
2 January 2013

Jeff, would you favour scrapping tax relief on pension contributions then and having a higher annual ISA allowance?

Jeff says:
2 January 2013

Alan, that is a different point.

My point is that these insurance companies have so-called expert investment managers, and if they aren’t making much more than gilts (and they don’t seem to be able to do this) then they are not worthy of the job. I can do just as well or better with cash, and the capital is still mine if circumstances change.

Jeff says:
8 January 2013

I’ve done a very simple spreadsheet. Interest at 2% means that I can take 5.4% per annum using interest and capital will last me 25 years (starting at age 65, that means up to the age of 90). This compares well to current fixed annuity rates, but as there is only 2% interest, then only this 2% could be taxed and even then, easily avoided). Depending on circumstances, all of the annuity could end up being taxed.
But as I stated above, 2% is the least interest right now – with 3% interest (easily achieveable by putting most cash in fixed term savings I can take 5.9% pa. AND if rates go up (which is very likely) I could take even more. If I were to take an annuity now (fortunately I don’t need to yet) I would be stuck with a pathetic return. And all the while I can get at my cash if I need to.
Also luckily, I don’t have large pension funds, having been saving cash instead for a while as I saw this on the horizon a few years ago.