What to ask your financial adviser to avoid costly fees

Big changes are happening in the way you are charged – you need to understand this new investment landscape

ARE you ready for the retail distribution review (RDR)? After many years in the planning, the implementation of the RDR is quickly approaching on 1 January 2013. While it will change the way financial advice is received, recent surveys show there is little awareness amongs investors of the review and why it matters.

An InvestSmart survey found 93 per cent of investors have no awareness of the RDR, while another, carried out by Defaqto, found that 80 per cent of independent financial advisers (IFA) believed the public knew nothing of the RDR. However, every investor should be speaking to their advisers about the RDR.

Sadly, when it comes to financial advice many investors do not understand what they are paying for and whether it’s a fair price. The RDR is designed to help solve this problem. It represents a very important change in the regulation of financial advice, designed to improve value for money.

Investors will be entitled to clear and simple information about the fees they are being asked to pay, and should therefore in a better position to decide whether they represent fair value. There are three main things investors should be asking their financial adviser about:

1 Find out what kind of advice your adviser will be giving you. Under the RDR, all advisers will have to inform their clients whether they provide “independent” or “restricted” advice before the advice is given. Independent advice is based on a comprehensive and fair analysis of the relevant market. It is free from restrictions that could impact on the adviser’s ability to recommend what is best for the client.

If the advice is not independent, it’s called restricted. It can translate into advice on a limited range of products or providers. Firms who offer restricted advice will be required to tell you this and what the restriction is before they provide a service.

2 Know what you are paying your adviser for and give your consent. Advice has never been free, but many consumers may think it has been because they previously paid the adviser indirectly, through the money they invest in the product. The RDR will require advisers to make any such payments explicit (if they do not do so already) and gain your consent.

3 Know your adviser’s pricing model. Ask your adviser how much they propose to charge and what services they will provide for that fee. Do not confuse the cost of advice with the cost of the product you are buying. If the adviser proposes to link their fee to the cost of the product so that you do not have to pay for advice directly, be very sure that you understand the on-going payment that the adviser will receive as a result of this arrangement post-RDR. And satisfy yourself that it is a fair payment for the on-going advice they are providing.

A big issue is the advice gap the RDR could bring to investors with lower amounts of money to invest. There is speculation that financial advisers who are unable to meet the RDR requirements will leave the industry. In addition, the fee-based approach will mean certain investors are unable, or unwilling, to pay for financial advice. These investors will be left to a Do It Yourself approach to investing and plotting their financial future themselves. There are a number of companies that already fill this gap and more are on the way. If you fall into this category, ensure you explore the options available to secure a solid financial future.

Ultimately, in the lead up to RDR implementation, don’t be afraid to ask direct and perhaps difficult questions around the changes the RDR will bring and what they mean for your investments. Good advisers should welcome a client who wants to be informed, and good advisers should be confident about the quality of their work and the fact that it justifies the fees they wish to charge.

Graham Mannion is managing director of InvestorBee.