The Financial Services Authority (FSA) today published more details on how financial advice is to be paid for from 31 December 2012 (part of its Retail Distribution Review – 'RDR').
The bottom line is that from 31 December 2012 financial advisers will (mostly) no longer be able to receive sales commissions from product providers and customers must agree any amounts deducted from products to pay an adviser. This means a shift to fee-based advice and transparency so that customers know how much and for what services they are paying.
Although we pretty much knew this already from previous announcements, today's papers put more flesh on the bones, including:
'Independent' and 'restricted' advice
Advisers will only be labelled independent if they can advise on the full range of products that might be suitable for you; otherwise they'll be labelled as offering 'restricted advice'.
This means an independent adviser must look at the whole marketplace, which should push independent advisers to consider investment trusts and exchange traded funds in addition to unit trusts, something that seldom happens at present.
Independent advisers will be able to rule out products, but only if they can show they're not relevant to you. If an independent adviser wants to specialise in a sector, e.g. ethical investments, they'll need to make this clear by stating that they're independent for that market only.
Advisers who sell their own funds
At the moment some independent advisers sell their own investment funds which in turn invest in a range of other investments. These advisers will no longer be able to call themselves independent unless they can show that their own fund is considered alongside all others in the market and the most suitable choice recommended to you. Plus these firms cannot pay their advisers any incentives to sell their own product over others. These changes should force several high profile firms to either clean up their act or only offer restricted advice.
No more commission (well almost)
Advisers (independent and restricted) will no longer be able to receive commission from product providers for selling their products. Advisers must instead agree a fee with you and give you option to either pay them directly or agree with the provider for the money to be taken from your investment/product. This means financial products will no longer have commissions built into their charges, so costs should fall.
However, commission can remain for non-advised sales, i.e. when you decide what to buy and simply ask an adviser to transact the business – the most common example being discount brokers. This shouldn't be an issue provided you ensure that you receive some service for the trail commission, or use a broker who refunds this (although the latter will probably work on a fee basis instead anyway).
Advisers may also (if they wish) continue taking commission on term assurance, critical illness and income protection insurance policies, but must disclose this to you.
Fees for ongoing services
Where an adviser charges fees for ongoing services they must state how much they'll charge, what you'll receive in return and how you can cancel the arrangement. No more earning trail commission for doing bugger all – result!
What about existing investments and pensions etc?
Trail commission on existing products will sadly remain unchanged, although in fairness it'd be impractical to change this. If you simply switch funds within a product or on a fund platform/supermarket then any commission will continue (advisers will not be allowed to re-negotiate these commissions). However, if an adviser recommends switching into another product or provider this is likely to fall under the new rules and you'll pay fees.
If you change adviser you should expect to pay the new adviser a fee and receive any trail commission paid on existing products as a rebate.
No more 'enhanced' allocations above 100%
Some financial products, usually investment bonds sold by insurance companies, might offer to invest 101% or more of your initial investment straight away. It's never money for nothing; they'll claw it back along with a lot more via future charges. This will no longer be allowed.
Today's announcements also included some proposals that are likely to become rules from 31 December 2012, but not set in stone as yet.
Fund platforms/supermarkets must allow easy transfers to competitors
Currently if you hold investments via a fund platform (also called 'supermarket') it's far from simple to move everything to a competitor (e.g. from Cofunds to FundsNetwork or vice-versa), you'd have to sell the investments and repurchase them. The platforms will have to offer a simple 're-registration' option, i.e. your investments can be moved across as is. This is long overdue; the platforms are simply dragging their heels for fear of losing business to competitors.
Separate platform fees and product charges
At the moment product providers usually pay platforms around 0.25% a year of fund value to feature their funds on the platform. This comes out the 1.5% or so charge you pay each year to the fund manager. It's proposed that this plus any other payments from product providers to platforms be banned. You would end up paying platform fees instead, but you'd expect the fund charge to fall accordingly, so overall costs should remain unchanged. The idea is that you can see exactly what you're paying for, it might even encourage more competition between platforms – overall a sensible move.
Independent advisers should not use platforms exclusively
In order to remain independent there may be times when advisers need to use a product that's on another platform or no platform at all. They should not therefore restrict advice to a single platform, or indeed, platforms in general.
If you haven't fallen asleep by this point then...
I know this might all seem a bit tedious but, believe me, this is hugely important stuff. It's the best attempt yet at ridding financial services of the cowboys, greedy salesmen and mediocre product providers that have blighted the industry for far too long.
I doubt the new rules will be watertight, they never will be. I do fear that slick salesmen will simply extract extortionate fees rather than commissions from gullible customers. But combined with better consumer knowledge (I hope this site can play its part) they should drastically reduce the scope for mis-selling, biased advice and being charged for non-existent service. They also provide a great opportunity for the good-guys to shine.