New rules could lead to you paying high upfront costs to see a financial adviser.
If you are used to getting "free" advice on money matters, you could be in for a shock at the end of this year. Financial regulators are bringing in rules that are designed to make the costs associated with money management more transparent, but these could lead to you paying high upfront costs to see a financial adviser.
The changes are part of something called the Retail Distribution Review (RDR), which has been widely reported in the specialist press, but the implications are still not clear to many ordinary consumers. The review will lead to huge changes for anyone who uses a financial adviser, and even to some who don't.
Read the following question-and-answer guide to find out how it will affect you.
Q . What is happening to financial advice?
A. When you visit an independent financial adviser at present, you may be given the choice of paying upfront for your advice or opting for advice to be paid for by commission paid to the adviser who sells you the product. In a nutshell, the big change is that you will not longer be able to opt for the commission-based pricing, and will have to pay for the advice you receive yourself. This change comes in on December 31, although many advisers may have already started preparing for it.
Q. Why is this happening?
A. The Financial Services Authority (FSA), the body in charge of financial regulation in Britain at present, says this is a clearer and fairer way of charging. This is because the costs you pay for financial advice now are included within the charges of products that you buy, which can have a huge effect on eventual returns. The FSA also says the customers will be able to trust their financial advisers more if they are not commission-based, because they will know that the right products are being recommended for the right reasons.
Q. Are there any other new rules?
A. Financial advisers will need new qualifications, and will need to advise on all of the types of products in which you could invest in order to be called an independent financial adviser. Otherwise they will be called "restricted advisers". Independent advisers will need a higher qualification for giving financial advice and hold a special statement from an accredited body as evidence that they are meeting standards.
Q. So what change will I see?
A. Going to a financial adviser will land you with an upfront bill, which many will find unpalatable. Advisers will argue that you would have paid this amount in the form of charges, but it is a big switch for many consumers to make.
Q. How much will it cost me?
A. No one is saying at present. Research by Which?, the consumer watchdog, found that independent financial advisers were quoting an average of £356 to help someone to transfer £10,680 into a new stocks-and-shares Isa. However, the cost is likely to vary widely, meaning that it's important to shop around.
Q. That is quite off-putting. Won't most people just stop seeing a financial adviser?
A. Research suggests that many people will be put off, while high street banks have already culled the ranks of advisers. Given the current economic climate, it is expected that those with modest incomes and savings may find it easier to seek help in other ways and invest for themselves. Information from JP Morgan Asset Management suggests that only 13pc of those earning more than £50,000 will be interested in paying for regular financial advice when the new rules come in.
Q. Is there any advice I can still get for free?
A. The FSA has said that organisations can still offer simplified advice, focusing on the immediate need of a customer rather than looking at the whole financial picture. It is not clear whether many providers will offer this.
Many customers will turn to execution-only (no advice) services, such as fund supermarkets, where customers can buy products without talking to an expert. They may offer generalised information about investing on their websites, while information in the financial press and online may also help.
New ways of labelling the funds that you can buy may help you too. Funds will start being labelled by how risky they are on a sliding scale, meaning that you can see whether the funds match your own appetite for investment risk.
Q. What about investments that I already have?
A. If you bought investment and pension products before the implementation of RDR, you may be in a disadvantageous position. The person providing your investment will still pay "trail commission", which is paid out annually to the financial advice firm that arranged the product's sale. However, that firm will not be able to provide any more advice on a commission basis, so you could be paying for something you can't get any more.
Q. Is it really important that I see a financial adviser?
A. While it is hard to know how much difference an adviser can make in individual circumstances, there are some points in your life when it is particularly important to have good money knowledge. One vital stage is on the approach to retirement, to make sure that you make the most of your pension pot and other assets. At other points it depends on your investments, income, knowledge and level of risk.
Q. Are there ways to bring down the cost of financial advice?
A. Shopping around will certainly allow you to bring down the cost, but remember that not all advisers are equal and be sure that you aren't settling for someone who will not understand your finances well. It can also pay to ensure that you have everything sorted out in advance in terms of paperwork and knowledge of where all of your money is. This will save time in appointments this is significant if your adviser is paid by the hour. You may also be able to pay in instalments.