Next year the way you pay for financial advice and investment products is to change dramatically. Following the Financial Services Authority's (FSA) Retail Distribution Review (RDR), commission payments to financial advisers will no longer be allowed. At the moment, if you go to a commission-taking adviser you get what seems like free advice, but this is not the case - your advice is being paid for through the commission that the adviser receives. The product provider gives your adviser a percentage of your investment, typically 1 to 8 per cent, or sometimes more on a lump sum investment.
This does not apply to investment trusts and exchange traded funds (ETFs), which do not pay commission. But, from January, independent financial advisers (IFAs) and restricted advisers will not be able to take commission and will have to charge you a fee for their advice, or agree with you that they can take the fee from the sum you invest. Some advisers already operate this model. This will offer consumers a number of advantages. IFAs shouldn't have a bias towards commission-paying funds such as unit trusts. They should have to consider products across the market and, if deemed appropriate, put their clients into investment trusts and ETFs, many of which have lower charges. It is also hoped that if the rules on commission are extended to platforms, investment trusts and ETFs that do not pay rebates will be added to platforms, widening options for consumers. You will also know exactly what you are paying and advisers will have to be better qualified.
Not a full solution
However, even though commission payments are no longer possible to advisers after 31 December this year, if an adviser sold a product prior to this, they can still continue to get the trail commission until the customer sells the product or the provider stops paying it. Patrick Connolly, head of communications at AWD Chase de Vere, says there is a risk that advisers will not suggest switching out of commission-paying products next year even if it is in the client's interest, so they can retain their commission. There is also concern that, prior to the end of the year, advisers might unnecessarily switch investors into high commission-paying products. Philip Haden, chartered financial planner at McCarthy Taylor, suggests checking the exact amount of commission on products you are recommended before the end of 2012 - if the commission is high, get a second opinion.
Asset management companies are launching commission-free share classes on their unit trusts and Oeics which have a lower cost as they do not include adviser commission. This should be good news for self-directed investors who do not take advice. However, a number of fund management companies are either not selling the commission-free share classes directly to investors or are placing such a high minimum investment on them - for example, £1m as opposed to the usual £500 to £1,000 - that, in effect, they are not available to most investors.
Fund platforms and execution-only brokers do not fall into the commission ban in January, so if they waive initial fees and rebate some or all of the commission they could still provide a cost-effective option. "Depending on the size of a person's investments, they could receive hundreds or even thousands of pounds extra a year by collecting these commission rebates themselves," says David Scrivens, director at discount broker Clubfinance.
IFAs that have chosen to offer restricted advice can continue to advise only on certain areas, products or providers, although they are supposed to clearly explain what they can advise you on. Meanwhile, customers with low tolerance to risk or loss may only be considered suitable for a limited range of investments. Make sure you establish whether your chosen adviser will consider you for a wide range of products or not.
The FSA advises that you ask an adviser how much they are charging you for their advice before 31 December 2012 and how much that same advice will cost thereafter. They should explain how these changes will affect you and your finances, and whether they will offer independent or restricted advice. Services you may have taken for granted such as annual portfolio reviews may no longer be offered without charge.
