September 7th, 2017
On 31st December 2012, the Financial Advice industry was transformed with the introduction of the Retail Distribution Review or RDR for short. This came about because the regulator at the time, the Financial Services Authority, was concerned that certain practices within the industry were unconducive to providing the best possible outcomes for investors. This resulted in many wholesale changes to how Financial Advisors and investment product providers carried out their day to day activities, which including an increase in the minimum level of qualifications required and the rules on what information clients should receive throughout the advice process, however arguably the most controversial of the changes was the movement away from clients paying for advice via commission to a fee based system.
When this change was first mooted there were concerns that although it was conceived as a way of making advice charges more transparent for investors, it would ultimately lead to a reduction in the number of individuals that would seek professional advice for the fear of the perceived costs. To explain, in the pre-RDR world, the cost of financial advice was covered via a payment of commission from the chosen product provider to the advisor, there was concern that this was not always obvious to the investor or drawn to their attention, especially as the cost was recouped by the product provider in the form of increased plan charges and early surrender or transfer penalties, if the full cost of the commission had not been made up from the policy. Because the costs were not always clear, the previous system could be manipulated in favour of the product recommendations that would provide the most remuneration for the adviser, rather than what the client truly needed.
Post RDR, the fee based system has now been in place for nearly 5 years and although the costs of advice are still a concern for some prospective clients, the fears that the profession would soon wither and die as a result have been unfounded. Since then, the industry has become a much fairer place for consumers. However, for advice firms, the challenge has been to find the best method to charge fees and to help clients to see the benefits of the change, and ultimately the long term financial value in paying for advice.
The fee model will differ from firm to firm, however it will typically be based on a percentage of the investment and broadly consist of a one off set up charge for taking an investor through the initial advice process and an ongoing service fee, which is essentially a method of budgeting for future reviews. Each advisor will establish their own fee structure and will need to demonstrate the value that they are providing in return. Some will charge less at the start, but place more emphasis on ongoing fees throughout the lifetime of the plan, whilst other firms seek to take the majority of charges upfront or over a set time period and charge a lower ongoing fee.
Despite the change to fees and varying costs of advice, prospective investors shouldn’t accept the upfront fees as a reason not to proceed with advice; whichever model an adviser firm uses, it is likely that they will provide a way to pay the fees from the investment over a set period of time (much in the way that commission worked), as opposed to requesting a lump sum payment, so it is always worth asking this question before deciding about affordability.
Therefore, the variety of fee payment options available has resulted in a ‘best of both worlds’ approach where investors benefit from aspects of the old commission regime, but can always be certain that they have received the best recommendation based on their personal needs, not which product will provide the most renumeration.
For further information please get in touch with Steve Helsdon at Contractor Wealth.
The value of investments may fall as well as rise and past performance is not a guide to future returns.
Financial advice is given by Contractor Wealth Management Limited. Registered in England and Wales under Company number 07773485 at 9 London Road, Southampton, England, SO15 2AE. Contractor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority under FCA Register reference 582895 and is an appointed representative of Intrinsic Financial Planning Limited; on the FCA Register under reference 440703 and Intrinsic Mortgage planning Limited as reference 440718.
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