From the end of next year we will have just two types of adviser in the UK - an independent adviser who advises on products from the entire market and a sales adviser, whose primary purpose is to sell a product from one or more providers. It will radically change the way consumers get financial advice, with financial advisers who want to label themselves 'independent' having to acquire higher qualifications. Crucially, independent advisers will no longer be paid commission by product providers. Commission has been shown to influence advisers' recommendations.
Of the financial advisers currently operating in the UK, around half (54 per cent, or almost 26,000) call themselves independent financial advisers (IFAs), according to a report by Aviva. But, according to Aviva, around 3m people will struggle to get decent advice once the new rules come into force because IFAs will target higher-net-worth individuals who can afford to pay higher up-front fees for advice.
Qualifications
The current rules mean IFAs need to hold a qualification which is broadly equivalent to an A-level - Qualifications and Credit Framework Level 3. The new requirements, however, will mean IFAs need to be qualified to QCF Level 4, which is Diploma standard, or equivalent to the first year of a degree.
Aviva's research found that more than three-quarters of IFAs believe they will still be in business on 1 January 2013. Many IFAs are investing time and money in preparing for the changes, with over two-thirds working towards the further qualifications required, and over half already adopting adviser charging.
However, a few experienced veterans will undoubtedly leave the industry, rather than re-qualifying, meaning a potential downside is that consumers will have higher-qualified advisers with less experience.
Cost of advice
Today, most IFAs are still remunerated by commission or procuration fees (whereby the product provider pays them a fee for placing the product with the consumer) instead of fees paid directly by consumers for the advice given. In terms of how much this advice actually costs, research from Deloitte suggests IFAs are paid around £105 per hour for advising on life, pension, saving and investment products. Separate research carried out by Aviva supports this, with 39 per cent of IFAs saying they expect to charge between £101 and £150 per hour post-RDR.
There are concerns among IFAs that this switch to charging consumers an explicit fee for advice could put some people off seeking financial advice. The Association of British Insurers found that two-thirds of individuals (65 per cent) thought financial advice on pensions, saving and investments was worth nothing.
Note that the prices quoted for independent financial advice are per hour, and some analysts estimate the true upfront cost of taking the services of an IFA will be at least £600 and more likely £1,000.
Ed Morse, the head of investment trust business development at F&C, says: "If you have £50,000 to invest and you're paying £1,000 of that for advice, I suspect a lot of individual investors will say 'I'm not paying that' because it's a huge percentage of their assets." Never mind that they have been paying those sums, and more through trail commissions.
If consumers baulk at paying high up front fees, advisers may choose other cheaper fee models or perhaps charge a percentage of the funds under management.
Could product fees fall?
A beneficial side effect for self-directed investors who prefer not to receive advice could be reduced product fees across the board. Until now, if you bought a fund directly from the fund manager you paid the same fee as if you had received advice on it. But several fund managers have been reducing their charges, introducing commission-free fund share classes, in anticipation of the RDR. Hopefully this trend will continue.
