THE retail distribution review (RDR) will change the way that you pay for financial advice: the process will not become cheaper, nor will investing become easier. However, it will be more transparent. The challenge for investors is to manage their costs and choose the right type of adviser.
HOW FEES WILL BE PAID
RDR, which comes into effect on 1 January 2013, may initially result in a variety of charging models.
Advisers may charge fees by the hour, like lawyers and accountants. But this is only appropriate if you need specific, one-off advice, like inheritance tax and pension planning.
If your portfolio is managed, hourly fees will be expensive since investments need regular attention. Management fees (either a fixed retainer, or a percentage fee) are more appropriate in this situation. Fees will vary based on the assets under management – the more assets your adviser manages, the cheaper the rate.
Jason Hollands of Bestinvest says that you need to clarify whether management fees include all costs – sometimes they do not include transaction costs. These can add up, especially with discretionary management (where your portfolio manager has control of when and how much to trade your portfolio).
RDR will eradicate “commission bias” (when an adviser may promote a product from which they earn a commission), ensuring that you are only advised to invest in suitable products.
For example, investors currently use the total expense ratio (TER, which incorporates all fees) to gauge how expensive a fund is. One popular fund has a TER of 1.69 per cent. Its manager told City A.M. that the management fee is 1.5 per cent, which comprises the adviser’s commission (0.5 per cent), the fund managers fee (approximately 0.6 per cent, although this varies), as well as the platform fee for the technology used to make transactions, and to check performance (which is roughly 0.4 per cent). The remaining 0.19 per cent will go towards administrative costs.
Under RDR, you will get a more exact breakdown of where fees are going, allowing you to monitor costs closely. The benefit is that now you will “not so much need to consider the complicated product costs, but the total cost of owning an investment,” says Hollands.
Some argue that RDR will drive up the cost of financial advice, making it inaccessible to those without large investment pots. Research from Deloitte estimates that 5.5m people could become “advice orphans,” and will not have access to advisers.
But Karen Barrett of Unbiased.co.uk says that smaller investors still have options. “Advisers have already released low-cost online packages.” MFP Wealth Management’s service, for example, offers planning services for a fixed-fee. Investors can then use these strategies to buy appropriate investments with self-execution platforms, offered by brokers like Hargreaves Lansdown. “The buzz-word is guidance,” says Hollands, where tools and services will help investors, but will not stray into the arena of personal advice.
However, those who take advice are likely to retire with a larger investment pot, according to Unbiased.
THE TYPE OF ADVISER
Advisers will need to continually develop their skills. This will create more niche advisers, concentrating on specific areas. Barrett says “consumers need to be mindful that there are different accreditations,” and that you should check your adviser’s specialism.
You may have taken advice from just one person in the past. But in the future, you may need to speak with a few advisers about different areas of your financial affairs to make sure that advice is appropriate for your needs. “Specific qualifications demonstrate that the adviser is competent in a certain area,” which will allow them to better service their clients, says Barrett.
The new world of RDR may scare some investors away from seeking advice. But options are available. While controlling your costs is important, it shouldn’t be at the expense of having a balanced portfolio that gives you a positive return after all charges.