This article was written by Dennis Hall, the founder of Yellowtail Financial Planning. It was written specifically for Morningstar’s special series about the Retail Distribution Review (RDR) in the UK. It is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors.
Have you ever stopped to consider how much financial advice actually costs? Possibly not, because in the past financial advice was traditionally paid for through commissions. But this is now changing.
The Retail Distribution Review (RDR) is bringing about fundamental changes in the way that financial advice is paid for. Starting in 2013, consumers and advisers alike will experience a greater level of transparency and clarity about the costs of advice. This will be unlike anything they may have experienced before.
Although RDR covers a variety of issues, including minimum qualification levels for advisers, it is the abolition of commission that is likely to cause the greatest problems. For many advisers, as well as their clients, conversations about the actual costs of advice are going to be new, and possibly difficult.
In the past the question of cost was rarely an issue, even with commission disclosure. Presented with a scenario or situation, an adviser typically provided some advice along with a solution in the shape of a financial product, such as a pension or an investment product. It was the sale of the product that generated remuneration for advisers, with the advice appearing to have been free!
Satisfied that their problem was solved, investors were happy for the financial product to be the conduit for their adviser’s remuneration. From the adviser’s perspective, quantifying the value they provided to their client was not necessary because of the commission they received.
A Conversation with Your Adviser About Costs
Now that commission is no longer an option, investors are going to want to know how much advice will cost, and this is a conversation where most investors and advisers have limited experience. With several years of experience as a ‘fee only’ adviser I am well aware that conversations about fees and charges happen at the beginning of the advice process rather than at the end. This leads to difficult conversations if an adviser isn’t able to communicate what services they will provide for their fee.
Similarly, investors may believe that value lies solely in the financial transaction, rather than the underlying advice. This would be wrong. Arranging and transacting financial products is largely administrative, whereas it is the advice leading up to the transaction that is most valuable. Ironically the most valuable aspects of what an adviser does, has often appeared to be a free service.
For some advisers and their clients, it may take a while before they are able to appreciate the most valuable aspect of their service is the advice being provided. For advisers and their clients, coming to terms with paying for advice is likely to be the biggest shift they have had to deal with in more than two decades of financial services regulation.
Questions for Investors to Consider When Speaking with Their Financial Adviser:
- Do you have a prepared schedule of fees and charges or do you make them up on the spot?
- Are financial advice fees going to be 'all-in', or will the fees be broken down into stages (i.e. Initial advice, implementation, on-going services, etc.)
- Does the fee agreement spell out what services will be provided and when additional fees will be payable?
Points for Advisers to Consider When Planning Services & Fees:
- Are you able to clearly articulate the different services you provide and the fees for each service?
- Do you have a written services and fee schedule showing what services are being provided and what is not being provided?
- Are you clear on the position of Value Added Tax in relation to the services you provide?
Morningstar Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com.
This article was updated in January 2013. It was originally published November 2012.
