rules from the Financial Services Authority – the retail distribution review (RDR), which comes into effect on 1 January – intend to empower consumers by making investing more transparent. The idea is to help retail investing work more effectively. But investors will also face greater choice in how they buy their investments, and this could open the door to confusion. It’s important to consider each method to ensure that you are buying appropriately.
THE VALUE OF ADVICE
The role of advisers is set to change. They will explicitly charge fees for giving advice, rather than the current commissions-led structure.
One benefit of using advisers is that they can help you to understand what the most suitable investments are, based on your circumstances, as well as planning other areas of your wealth – like inheritance. Though advice has never been free, surveys show that many Brits are reticent to pay for it: BlackRock recently surveyed 11,000 people and found that only 35 per cent of people were willing, and most have unrealistic expectations of what advice should cost.
Under RDR, upfront fees for advice could range up to 3 per cent of assets under management, as well as 1 per cent on an ongoing annual basis. Those taking advice are likely to retire with a larger investment pot, so if you find this too expensive, you might consider a consultation with a wealth planner. This will allow you to pay a one off fee for bespoke advice. “Advisers can talk to you about attitude towards risk – which some people may not fully understand – helping you to develop a long-term strategy,” says Karen Barret of Unbiased.co.uk.
An investment platform allows you to buy investments, such as funds, and monitor their performance through an online panel. They are provided by companies like Hargreaves Lansdown. Traditionally, investors who were comfortable with making their own choices used them. But RDR could encourage more people to go online to seek guidance.
Platforms vary in their capabilities: some only execute transactions; others offer more sophisticated tools. However, they do not currently fall under the remit of RDR (this is likely to happen next year), so providers are still able to earn commissions from sales. “This is unfortunate, because not all providers are clear about their charges,” says Nick Curry of Rplan, a platform providing free online tools for investors.
Rplan allows investors to compare the costs of different providers, and Curry is optimistic that RDR will increase demand. He estimates that it could save you up to £620 per year in adviser fees.
Choosing a fund is only half of the challenge. Equally important is how you allocate assets. Jason Hollands of Bestinvest says that “research shows that most of your return comes from asset allocation decisions”. Platforms, like Bestinvest’s FIRST, can offer guidance on this and suggest model portfolios, based on different risk profiles and investment timelines.
Investors should be cautious about using platforms based abroad, however. If anything goes wrong – for example, a fund provider collapses – investors may not be fully protected.
While platforms are helpful, be aware that they still do not consider your personal circumstances.
Investors can also invest directly through fund providers, which have an array of tools similar to independent platforms. However, many funds will only offer general guidance. This is partly because of regulation, since giving advice means that they would need to comply with RDR legislation. Some fund providers feel that this goes outside their core business.
Mark Till of Fidelity, which welcomes retail business, says that it is about choice. He prefers investors to be informed, which often means going through an adviser.
RDR is set to shake up the entire retail investment sector, for advisers and for platforms. Investors will have more choice. But increased choice may be overwhelming for some. Bespoke advice is the best way to get specific information based on your personal circumstances. However, those without access to advice still have very good resources to find guidance.