This article was written by Sue Whitbread, the communications director at the Institute of 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.
To learn about the basics of RDR, read this article and watch this video.
Getting real value for money is going to be essential for any investor working with a financial adviser from January 2013.
Starting in 2013, there are going to be huge changes to the way that you pay for professional advice. Essentially, instead of paying your financial adviser indirectly through commissions, you will start agreeing on more upfront payment methods. The good news is that the nature of the services being provided will improve and you should expect more value-added financial advice in return for your fees.
It’s no longer good enough for advisers to simply recommend a portfolio of investments which they believe is suitable for your needs. They will have to do a more thorough analysis of your financial needs and examine the full range of investment products that will help you reach your goals. Their recommendations must also clearly match the degree of risk that you are prepared to take.
But hasn’t this always been the case? Not quite. While advisers have had to ensure that they provide appropriate advice for your needs as to whether you’re looking for income, growth, or both, and also ensure this advice is in line with your attitude to risk, in most cases there have been limitations to their recommendations. The commissions that were paid to advisers for recommending certain investment products have contributed to biased advice in the industry. For example, rarely have advisers considered perfectly viable and often lower-cost investment vehicles such as investment trusts or exchange-traded funds (ETFs). Without getting too technical, I suspect that this has more to do with commission payments rather than the structure or suitability of these different investments.
From 2013, advisers must now carry out research on a whole range of product areas and are freed from the constraint of selecting from products which will generate a commission payment to them.
This needn’t be a daunting process if you are an individual searching for a new financial adviser. Start by considering the adviser’s qualifications, whether they are providing independent or restricted advice, whether they are a specialist in a particular field, and whether they operate as an individual or as part of a team. You can then select the adviser or financial planner who you feel you can trust and whose interests are aligned with yours.
Once you have chosen a financial planner, you will then explore in some detail what your life goals are and what costs and timescales are attached to those goals. This is where it gets very interesting when you are working with an adviser. You many never have done this kind of financial planning exercise thoroughly before. What emerges from this exploration is a roadmap for your future, something that gives your investment process and investment decisions purpose and reason. You’ll come to realise that investing is not about getting the best possible return out there, which involves predicting the future and a degree of luck. Investing for your future is all about balancing risk and return to achieve suitable results from your hard earned cash to help you meet your goals.
While many people may gripe about the changes RDR is causing, RDR is ultimately helping the financial advice industry improve over the long run and provide consumers with better qualified advisers who can offer a more streamlined and valuable service to their clients. You’ll now know very clearly what you have to pay to your adviser, and the days of smoke and mirrors, which were fostered by commission payments, are thankfully going to be gone.
The Institute of Financial Planning is hosting 'Financial Planning Week' from November 26 - December 2, 2012.
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