How financial advice regulation will affect all UK retail investors

THE Retail Distribution Review (RDR), which comes into effect on 31 December this year, will transform retail investment. The Financial Services Authority (FSA) introduced RDR to better protect consumers. It aims to help investors understand the costs associated with financial advice, and to improve its quality.

However, it will require investors to be more proactive – in both managing their money, paying more attention to the type of adviser they use, and in carefully considering how much they pay for advice.

CONSIDER THE FEES
Previously, advice fees were buried into the cost of products, and commission was often built into the price of what was sold. This will no longer be allowed; the connection between provision and advice will be severed. Charges will need to be transparently outlined and agreed to in advance.

There are two ways that you will pay for advice. Either you will be charged fees directly, or your adviser may deduct them from your investment capital.

Smaller investors, with less than about £50,000, may be at a disadvantage – they may be hesitant to pay upfront fees and may not want fees to be taken out of their capital. Allianz Global Investors recently found that 60 per cent of advisers believe small investors will be uneconomic to service, and 16 per cent will close their doors entirely to them.

TAKING RESPONSIBILITY
But given the complexity of some financial products on offer, Georgina Partridge of Plutus Wealth argues that “there is long-term value in seeking advice.” It can help to set clear, realistic financial goals.

Unbiased.co.uk also found that financial advice does encourage better investment decisions. Those who use a qualified adviser retire on average with £74,554 – nearly double the paltry £37,277 of those who do not – though this may simply be because people who seek advice have more assets.

There are, however, services on offer for savvy investors who are happy to do their own research, and who just want a cheap, efficient way to pick their investments. Execution-only platforms, offered by brokerages like Bestinvest and Hargreaves Lansdown could be a flexible and inexpensive way of purchasing products. They could also be used in conjunction with a short-term relationship with a financial adviser. If you treat your adviser like a lawyer – and pay an hourly fee for advice – you may then go away and invest in appropriate products, albeit at a steep price.

THE NEW INDEPENDENT
RDR requires advisers to gain an annual statement, demonstrating that they meet professional standards. Advisers will also need to explicitly state the type of advice that they can offer. There are four categories: independent advisers can provide comprehensive market-wide advice; restricted advisers can offer advice on certain products; simplified advisers can’t consider individual financial circumstances; and basic advisers offer only a basic assessment.

It’s particularly important to understand the new concept of “independent.” It currently describes brokers who are not tied to a specific firm, but the new definition implies an ability to offer market-wide advice. “The old label takes on a completely different meaning,” says Jason Hollands of Bestinvest, and it is no longer paramount to seek an “independent” adviser. A “restricted” adviser may be more appropriate, since they can offer you more specific niche advice.

Increased transparency of fees and more rigorous categorisation of what advisers can do should be good for investors. But the changes RDR aims to deliver are likely to reduce the size of the market and the cost of advice is likely to become prohibitive for many smaller investors. One thing is sure: given that they will need to take more control over their money, it’s vital that investors rise to the challenge.