Conal Gregory, AIC Regional Journalist of the Year, looks at major changes to the advisory market
Next year the financial advisory market will be fundamentally changed. Whilst for generations, advice has been largely remunerated through commission, in most cases payment will be by fees.
This ought to place qualified financial advisers in a similar professional position to accountants and solicitors.
The process will be far more transparent. A statement of the sum to be paid for advice is currently tucked away in the small print issued by an insurer or investment company but few pick up on this point or can see in advance how this might alter between different firms.
For investments, few providers now reveal what, if any, payment will be made for receiving advice from an intermediary although discount brokers proudly show how much they have negotiated for the initial rebate.
The sums involve can be substantial. An adviser could earn seven per cent commission when selling a £100,000 investment bond.
If he is to earn the same sum (£7,000), the client will now have to pay the adviser or agree that it is charged by the provider and then paid to the adviser.
The changes are the result of intervention by the Financial Services Authority (FSA).
It should be good news for consumers as it should mean that independent financial advice will only be given by qualified professionals and that clients understand exactly how much they are paying, as well as the level of service they can expect in return.
“Financial advisers will have to focus far more on providing a high level of ongoing service to their clients as otherwise they will simply stop paying them,” says Elizabeth Hastings of AWD Chase de Vere in Leeds.
From January 1, commission to advisers on investment products should cease and from January 2014 payments by financial providers to websites through which investments can be effected will be stopped.
These new regulations apply to new business but existing arrangements can continue. This means not only that the adviser can continue to receive the initial fee (or rebate all or part of it) but also the loyalty or ‘trail’ commission, which is usually 0.5 per cent, on plans already set up.
This does not mean that those on modest means will be unable to gain qualified advice. Instead, if they cannot or will not pay directly, they can agree that deductions to pay for such advice can be taken from their investment. However, transparency will have been achieved.
This route is called ‘facilitated payment’. The provider will deduct a percentage of the money invested and return it to the adviser provided an authority has been obtained.
One of the grey areas is non-commissionable products like National Savings. If an ‘independent’ adviser identifies that such a product is appropriate, he is duty bound to indicate its suitability.
Advisers from January will also have to be qualified to deal with all financial areas – from mortgages to retirement planning – or signify that they are ‘restricted’ to specific fields. This could mean there will be different practitioners within one firm who together can provide a ‘one shop’ financial service.
Research by JP Morgan Asset Management in the summer revealed that just 13 per cent of those with a household income above £50,000 were prepared to pay for regular advice when the new rules comes into effect. However, without informed knowledge of the markets, a DIY approach could prove disastrous.
Key questions to now ask your financial adviser:
• Will you be ‘independent’ or ‘restricted’ from January? Only the former will give a full picture
• What qualifications do you hold?
• What fee and at what frequency will it be charged?
• How often will a full valuation be issued?
• How frequently will there be client meetings? Will there be postal or email updates in between?
On qualifications, look for either Chartered Financial Planner or Certified Financial Planner. As a minimum, all should have secured Diploma status. Ask additionally about experience in their chosen field.
If you have been serviced by a bank, this may well change as they move out of this area – following the PPI scandal – or now say they only have competence in ‘restricted’ fields.
Barclays, HSBC, Lloyds TSB and RBS have all pulled back from offering financial advice.
High street bank funds have proved convenient but are also some of the worst performers.
Two blatant examples are the US Alpha fund offered by Barclays and Multi-Manager Equity fund sold by Spanish-owned Santander (which took over Alliance & Leicester).
Over the last five years, Lipper research reveals the latter actually lost money, falling 5.3 per cent by comparison with the best fund in the sector which gained over 59 per cent.
Unfortunately, those who have entrusted their money in this way may not realise the poor service as no one has independently reviewed their holdings and made alternative recommendations.
The exception will be private banks and discretionary wealth managers. Always check that they thoroughly understand your attitude to risk and financial objectives, both short and long term.
For those taking a fee-based route, a tiered level of service may be offered, which in part reflects the amount of money invested.
There is likely to be far more retail interest in areas that formerly paid nil or very low commission and no trail bonus, notably exchange traded funds, tax-exempt savings plans offered by friendly societies, investment trusts and tracker funds.
When looking for a financial adviser, it makes sense to ask other professionals, such as your accountant. Check through the website unbiased.co.uk for specialists close to your home or work.
A fairly new comparison website (vouchedfor.co.uk) should help to find a trustworthy adviser.
Its partners include the platform Funds Network and the Institute of Financial Planning.
At the end of last year, the website listed just 272 advisers who were exclusively fee-based by comparison with 7,941 who were paid through commission or a combination of the two.
Research earlier this year by the consumer body Which? showed that the average administration fee charged to set up an equity ISA was £356.
The two extremes were £2,500 quoted by one adviser and slightly over £100 required by two others.
Anticipating a rush by investors to do their own research and make investment decisions, more funds are giving risk ratings on their websites and through platforms where they can be held for tax wrappers like ISAs.