Paying for financial advice

From 31st December, investors will have to pay an explicit fee for financial advice, as the commission being paid by product providers is largely abolished.

This shake-up – which happens as part of the FSA Retail Distribution Review – introduces mandatory ‘adviser charging, where all charges for advice are both disclosed and agreed upfront.

Some new research by Deloitte has found that many investors are unaware of these changes and will not be prepared to pay for advice.

According to the research, 84% of people are unaware of the Retail Distribution Review and its implications in terms of advice fees. 54% of investors would not be prepared to pay a fee for advice.

This research is interesting for a number of reasons.

Awareness of the Retail Distribution Review appears to be low, but we suspect that it is higher amongst investors who already have an independent financial adviser.

It should be higher still with those clients of advisers who have embraced the Retail Distribution Review, who have been operating on this remuneration basis for some time.

Advice from either an independent or tied financial adviser has never been ‘free’. When paid for via commission, advice is funded from the product charges paid by the investor.

What the Retail Distribution Review does not prevent is advisers continuing to work on a speculative basis, only receiving payment when they sell a product. Adviser charges can still be deducted from investment products.

What professional independent financial advisers will do however is charge a fee for advice and then make separate charges to implement and review financial arrangements.

This ‘unbundled’ pricing model removes the cross-subsidy that has historically existed between investors – with those that make investments paying for their own advice and the advice given to others that did not proceed.

Unbundled pricing also reduces the risk of a biased recommendation, where the adviser recommends a particular course of action simply to get paid.

Receiving advice from an adviser operating on a speculative basis (offering advice for ‘free’) once the Retail Distribution Review is implemented at the end of this year could be very damaging to your financial wellbeing.

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