Financial advisers are being forced to changeApril 29th, 2012 by Dan Woodruff, Certified Financial Planner with Woodruff Financial Planning
The way you access financial advice on investment and pension products is changing dramatically from the start of 2013. Here is a summary of the changes, known as the Retail Distribution Review. More importantly, we have outlined why this is important to you if you receive financial advice.
What is changing?
From the end of 2012, financial advisers will no longer be permitted to receive commission from product providers for the sales of their products. This is an important change which we wholly support, since we feel that commission adds complexity and the capacity for product bias to the equation. We have charged fees for our advice for many years since our clients value our independence from product providers. After all, if a product is recommended to you by a commission-based adviser, how can you be sure they have done this in your interests or theirs?
From next year advisers will be required to agree their remuneration with you in advance, just like with any other professional service. That is how we currently work – we agree a fee for initial advice and ongoing reviews, so you know exactly what you are committing to. Commission at present means that some consumers don’t really understand how much they are paying for the advice they receive. Bad practice still exists. A few days ago I heard an adviser from a major financial advisers tell a room of business owners that they don’t charge for advice. Really? I don’t think that company works as a charity. Therefore, that adviser was being more than economical with the truth. What she meant but didn’t say was that her firm takes commission for product sales; to imply that this is free is unethical.
Financial advisers will also be required to be clearer about whether they are able to recommend all products, or just a selection. This is important since independence is often implied but not delivered. For example, I have heard another adviser from a different national brokerage describe themselves as the largest independent firm. That implies they are independent financial advisers, right? Well, actually, he means that they are not owned by any banks. In fact, their advice is tied to a few products.
From 2013 financial advice will be Independent or Restricted. Your financial adviser will be required to clearly inform you of their status and what this means. To maintain independence (as we will), advisers must undergo rigorous research and continuous professional development. It should be said that some top quality firms may elect to be restricted, perhaps because they specialise in a particular area.
More professional advice
This is the most important change since advisers will be required to have a much higher level of qualifications, and sign up to an ethical code of practice. The standard is being raised from the equivalent of an A level to that of the first year of a degree. Our standards are much higher (see here), but what this change should mean is that there will be fewer advisers able or willing to keep themselves up to date with changes and do the exams to prove it. Ask your financial adviser if he will be able to trade after 2012. To prove this he will need a statement of professional standing.
If you want to know more check out the Financial Service Authority’s website on this subject.