The end of free advice…..

The purpose of my blogs have primarily been about promoting the idea of financial education whether this is at schools, which would be ideal, or at any stage of someone’s investment cycle.

One of the biggest changes about to hit us is something called the Retail Distribution Review. In this article I want to focus on the adviser side. In my next article I want to touch on the implications for going direct because this is being ignored.

At the moment the press is starting to sniff a story and with all stories the danger is that investors will be the eventual losers. Here are some examples of recent headlines:

“How ‘the Silence of the Financial Advisers’ could make them a killing”

“The pending financial advice shake-up shambles and why RDR must be stalled”

“End of line for ‘free’ Financial advice”

I want to unpack some of key aspects of these articles but firstly the table below sets out the difference between the new adviser charging and commission:

Adviser Charging	Commission
An agreed payment made by the client to the adviser	A payment made by the provider to the adviser (sometimes agreed by the client)
An expense of the client (although Adviser Charges for pensions are eligible for tax relief)	An expense of the provider with no tax liability for the client
Managed by the adviser on behalf of the client – may be facilitated by the provider	Managed by the provider
On-going Adviser Charges can only be received where an on-going service is being provided	Trail commission can be received without an on-going service
Must be based on the services an adviser provides	Can be based on the products an adviser recommends

These are very subtle changes but the key is the relationship moves from the provider / adviser to client / adviser. The client can choose to pay the fee by means of a payment outside of the solutions (likely to be subject to VAT) or through the money held in the solutions.

If they decide to pay via the solutions then there are some small points they need to understand:

1. Any fees coming from an ISA will come out of the annual allowance
2. Any fees from from an investment bond will come out of the 5% annual tax deferred allowance
3. Any fees coming from non ISA investments may be subject to CGT

In plain English if a client had agreed trail commission of 1% a year, then from 1 January 2013 the adviser / client need to agree a new fee structure which could be 1% a year. So actually there is no real difference.

The differences are in how the money is taken and this is really important. Effectively the provider has provided the fee through rebates but ultimately whether transparent or not the client has ended up paying. Now those fees will be a lot more transparent.

It will also be important for financial planners to clearly identify their service proposition. So if I am paying 1% a year what is my financial planner doing for this? Effectively financial planners need to be good at communication and service and this is the key change from 1 January and this is what people are missing.

So turning to the scary articles:

“How ‘the Silence of the Financial Advisers’ could make them a killing”

The key point is that if no “transaction” happens then the financial adviser can continue to receive the old commission. So the argument is that some advisers will do nothing and continue to be paid. Interestingly and I have no evidence to back this up but I suspect with direct platforms the same will apply, if you stay in the same fund and do nothing they can continue to take the money.

So this is a loophole that both financial advisers and direct operations will benefit from which is a bad thing for all. The article is very clear about financial advisers but it should also be saying that direct operations could make a killing.

My advice to you is ask your financial adviser what their plans are, what the fees are and what the service is. I would also ask your direct operation the same questions.

Don’t be caught out…..

“The pending financial advice shake-up shambles and why RDR must be stalled”

The article by Lord Flight indicated that 22,000 advisers are not yet ready for RDR, part of this is due to the need to take further examinations. There are also complications with the EU which effectively allows member states to opt out of RDR. He argues that only the elite can afford adviser fees leaving many lost without advice.

His argument is that there should be a year delay. Interestingly for direct operations they do not need to implement any changes until 1 January 2014. This means clients could face the same headlines next autumn “the end to free investments”.

Whatever your view, the point is all sides of the industry have known about this for several years and actually everyone should go live from 1 January. The sympathy I have is that the FSA have not finalised some of the key points and although the FSA have said many providers are ready, my experience shows they are not.

My point again is talk to your adviser, or your direct operation and see where they are before you make any decisions.

Don’t be caught out……

“End of line for ‘free’ Financial advice”

The point really is back to the provider / adviser relationship and the fact this is going. I have long argued that those with £100,000 plus should be able to work with an adviser. Some advisers may offer a lean service for £50,000. Effectively if the fee is 1% then the maths are easy to work out.

If you take someone like Hargreaves in their last report and accounts you can work out that their average client value is around £40,000 so you can start to see a gap for clients.

I felt clients would go into two directions – the banks, however I have seen some of their fee structures and clearly this is not aimed at those with less than £100,000 and then direct operations. I still believe direct operations will benefit but non of these that I have seen provide any real financial education. Effectively they sell funds and products with no help on financial planning.

Financial advice was never free, the clients will now have to agree a fee and if they want that to come from the solution as before that will be more visible. The press need to be careful not to sensationalise this and add to the confusion.

The key really is to ask the adviser what their fees are, what service they offer and be open with how much you have to invest. There will be some who target those with less than £100,000 especially family members of clients, or perhaps those who see long term benefits.

So again it is about asking the questions and understanding that there was never free advice.

I know this is mammoth piece but be careful of the scary articles, digging around before you make any decisions.