/ Money

What’s the cost of unbiased financial advice?

There’s a good chance that you’ve paid for financial advice at some point, either through product commission or as an upfront fee. So how can you be sure that the advice you’re receiving is 100% impartial?

Until now, financial advisers have been able to make money by selling you financial products and earning commission from the product providers. After a great deal of scrutiny, this practice has raised the question, ‘what makes an Independent Financial Adviser (IFA) truly independent?’

The trouble is, the way advisers make their money has left them open to question over why they might recommend the products they do and whether or not they’ve got our best interests at heart.

As an IFA’s advice can mean the difference between your comfortable retirement and financial hardship, new regulations have been introduced to resolve the issue of impartiality.

New rules to tackle bad advice

The Retail Distribution Review (RDR) is causing quite a stir in the financial world as numerous advisers prepare themselves for the new standards.

According to the Financial Services Authority, the standards aim to:

  • Increase consumer confidence in independent advice.
  • Encourage advisers to explain complicated products in a way we can easily understand.
  • Ensure all advisors are qualified to a minimum standard.
  • Make sure commission or other forms of payment don’t influence the advisers’ advice.

It’s slightly worrying that advisers will only be obliged to offer you unbiased advice from this point onwards; why didn’t these rules exist before? According to these rules, advisers will now need to be clear with you about the way they’ll charge you and about the range of financial products you have to choose from.

Will they price us out of impartial advice?

However, industry experts are worried that people may be deterred from taking advice if more advisers move toward charging fees upfront. After all, for a service that I might consider to be worth £100, an adviser might charge £300.

Another concern is that some advisers may only work with wealthy clients, willing to pay higher fees and bring more regular business their way. Especially now they’re not allowed to charge ‘trail commission’, which previously allowed advisers to charge you a fee every year after selling you a product, even if they didn’t provide any further advice.

Financial advice has never been free; we were just sometimes charged for it in a roundabout way (either via commission or upfront fees). Many advisers have always put the interests of their clients first, but the new rules should help weed-out the ones that don’t.

Do you think the new regulations will increase your confidence in financial advice? Do you trust financial advisers?

Comments
Profile photo of richard
Member

Well – I did use a no fee Financial adviser about 15 or so years ago when I first became aware that long term care for the elderly was not free in any way unless you were poverty stricken – so I wanted to release the equity to keep it out of government hands. Found that it was easy to do – but did not use the facilities of the actual financial advisor as he seemed to only offer his own commissioned solutions – but I shopped around to get the best deal – I am happy that the equity is now being used for better purposes than my long term care (that I was promised was free in 1948).

I found it far easier to get rid of savings by redistribution.to my “pseudo inheritance”, I am happily poverty stricken except for my pet health savings to pay for their illnesses.

Member
BenJie says:
22 April 2012

The reality is that most people only have access to products from the big institutions, ie those that advertise in the sunday papers. After RDR only the ultra wealthy will have access to a wider range of products because IFAs will not want the odd £300. Up to now of course they got commission on products but commissions were pretty standard across products and differences hardly worth not giving good advice. Classic sledgehammer to crack a nut and now those who are ‘comfortable’ and would have benefited from access to wider product range will probably not get that choice. All the RDR will do will entrench and increase the Market share of the big providers and restrict choice.

Profile photo of VynorHill
Member

Financial advisors are unlikely to advise on any product that doesn’t generate a fee for them. Thus whether paid up front or taken from profits/payments into a scheme, they make a living. I used ‘free’ ones. One was attached to a company and advised on their products only, the other a free range Advisor. Both advised ten year with profits endowments to match my cautious investment approach. I would have been better off stuffing money under the bed in the first instance, the second gave me around a seven percent return. Since then I’ve done it myself.

Basically, any investment, other than a straight forward savings account, is a gamble. Every one of them informs you that you might not get back what you put in and every one of them relies on a guess as to what is going to happen in the future, based on past experience and future expectation. Experts often get it wrong and popular schemes flop. An example of this is those policies, plugged a few years ago, that guaranteed your capital back and a percentage of the movement of the stock market. I’m reading lots of negatives about these now.

So, investors need to pay broker/advisor fees and accept an annual fee to manage the investment. It means that the investment has to cover this and make a profit to be any good. A good advisor will tell you what’s available, others will look at the incentives offered to promote a particular product. Can one tell who does what? Can one risk taking the advice when even the giant- ‘famous’- companies have a string of attractive sounding funds that are doing badly? Do most of us have the time or inclination to do the research so that we can judge the advice we are paying for? It’s a real mine field for the unwary and the financial advisor will have his fee what ever happens.

Profile photo of jem
Member

I have used an adviser in the past but always haggled the fee down and now get trail commission rebates. Howver for some reason I cant get that on my SIPP on one well known platform

One thing that does annoy me though is the fact that some platforms/fund managers wont allow you to deal with them direct and cut out the IFA and wont rebate any ‘commission’ they would normaly pay out as they keep it for themselves. Given that there has been publicity about how fees do drag down the end value of an investment, if you are competent enough to make your own decisions you should be able to benefit from that

Member
Naima says:
23 April 2012

Financial advice has never been free,,,I need to reincarnate 10 times to get over the grief of trusting
the bank financial advisers-who hasseled me to place my savings put aside towards the purchase of a house-dangling the return of 8% a year, I told them i would like them to invest in short term plan-1year and divide my pot of gold between Tesco-M&S-Asda- once i signed- they distributed the money for the HSBC financial services locked in for 20 years. lost over 12000 pounds-plus 600 pounds in my ISA’S
never saw the so called financial advisers to explain and was too vulnerable entangled in marital nightmare- to seek help or compasation for the mishandling of my money.

Profile photo of Matt Woodington
Member

Hi Vynor Hill,
You’re right when you say that every investment is a gamble but I think that just highlights the value of good quality advice.
Under the new rules an adviser will need to make it clear to you whether they are ‘independent or restricted’. If they tell you they’re independent it means they can advise on all types of products but if they’re restricted they can only advise on specific areas, like pensions for example, or only make recommendations from a smaller range of products.
This should mean they are not merely advising you to buy the product that makes them the most money.
The fact that so many investment products don’t perform as well as we want, means it’s really important to have diversification. An adviser can’t necessarily pick the next big winner but a good one can help you set yourself up with a range of products that would not all fall down at the same time, protecting you against big losses and hopefully giving you more chance of healthy returns.
Although advisers can still take trail commission on products sold before the end of this year (so long as they actually provide an ongoing service), trail commission will be banned on sales from January 2013 onwards.
Perhaps taking advice for a fee to help set up a balanced investment portfolio, then re-engaging with the adviser when you need to could be a sensible approach in the future. At least you’ll know what you’re paying them.

Profile photo of VynorHill
Member

Thanks Matt. I’m not knocking advsiors per se> Both of mine were pleasant individuals who listened to what I told them. If that’s what they want to do for a living -fine. I’m not even suggesting that they were out to make maximum profits out of me, but once they had actually got me to sign up, they had their fee guaranteed, while, in one instance I actually lost money. I’m still sceptical and suspicious of the financial industry in general and wonder how many ‘balanced’ portfolios are making money these days. Anyway, at my age, it’s cash only from now on. I may not make a fortune from it, but it is as secure as any money can be in these troubled times.