Paying for advice is due for a radical overhaul


THE swathe of people who have already retired, or who are about to retire in the next few years – the so-called post war baby boomers – relied heavily upon independent financial advisers (IFAs) to take care of their mortgage, life insurance, savings and investment needs. They built strong personal relationships with IFAs when they were starting families some 20 to 30 years ago, just when their needs were greatest and their finances were most stretched.

Many of these people have since accumulated high levels of personal wealth. In many cases, this was caused by periods of staggering levels of property inflation. And this newly-found wealth, often duplicated by inheritances from parents and other relatives, gave every reason for consumers to take more interest in what was happening to their money. These consumers sought more and more information. Alongside a willingness by competing financial organisations to oblige, consumers are now both more enlightened and increasingly demanding.

At the same time, IFAs have also been facing great winds of change. The largest of these is connected to how they get paid for what they do. For the past six years, IFAs have known that the end of their current system of remuneration is approaching. Among many other provisions, one key feature of the Financial Services Authority’s retail distribution review (RDR) is that IFAs will no longer be paid commission by fund managers when they recommend their products to clients.

Currently, advisers receive an initial commission of up to 5 per cent from the investor’s capital, and a further 0.5 per cent per year so long as that investment is held. But following the implementation of RDR on 31 December 2012, this will come to an end.

Critics of the current system say that it fails to make it sufficiently clear to clients that the cost of the advice is taken out of the initial capital, and that clients are left thinking the IFA’s advice is free. These critics also say that the current system gives advisers an incentive to recommend products which give them a commission, regardless of the needs of the client.

Because many clients currently assume that advice is free, IFAs have an uphill struggle to find an acceptable means of charging clients for the advice they will give in the future. These pricing models could take the form of a simple levy on the sum invested or a separate charge, depending on the complexity involved.

The future financial adviser will be as well-qualified and regularly assessed for his or her competence as a lawyer or doctor is today. The days when anyone could set up as an IFA have long gone; they have been replaced by an increasingly difficult and demanding regime of study, proven competence and achievement of formal qualifications. It is thought that up to 30,000 IFAs will leave the industry almost immediately because they are unwilling or unable to pass the new examinations. As with doctors or lawyers, serious miscreants will be barred from holding any position in a financial organisation.

Only time will tell if clients are prepared to openly pay for financial advice. But I suspect that most of those IFAs who do survive will not do so without offering their clients self-directed or execution-only services.