This article was written by Nick Cann, chief executive 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.
Financial advisers are in the process of adjusting to new Retail Distribution Review (RDR) rules calling for more transparent fees and increased professionalism. To satisfy these rules, many advisers are in the process of overhauling their business models and charging structures.
This sounds like good news for the industry, but is it?
From January 2013, your adviser can no longer be paid for the advice they provide through commissions generated from recommending and selling investment products. Charges for advice will now have to be agreed upon upfront, before the financial advice process can begin. Paying for advice indirectly via investment product charges will no longer be an option for advisers and clients, and the new upfront charging structure may put clients off as they realise the true cost of financial advice.
For advisers to survive and thrive in this new world, they will have to make big changes to the services that they offer and to the structure of their businesses. They will have to show their clients that they are getting true value for their money.
To start, advisers will have to decide whether to offer independent advice, where they can recommend products from the whole range of available investments on the market, or whether to give restricted advice, which limits their choice to a smaller range of products. Advisers will have to make it very clear to their clients which category they fit into early in the proceedings.
Advisers will also have to discuss the cost of their advice with their clients as well as discuss the services that they will provide in return for different charges. Clients will want to see very clearly where value lies in the whole investment advice process.
New adviser charges can be arranged in a number of different ways. For example, clients can pay a flat fee, have a fee deducted from any investment that they make, pay an hourly rate, or they can agree to pay a percentage of the value of their portfolio each year. Whichever way is chosen, the cost is transparent.
At the moment, ahead of the RDR rules coming into force, many advisers still rely on taking most of their income at the time that they deal with their clients’ transactions. This transaction point is the time when advisers receive their commission from investment providers for recommending a product. But the majority of advisers have now moved to a model where they are only looking to charge 3% for the initial advice phase and then between 0.5% to 1% for an on-going review service. This is a huge improvement from the era where 7% or 8% initial charge could be taken for selling investment bonds! However, there is still the matter of where the value for advice really lies, which is not in the product recommendation. The value lies in a comprehensive financial planning service. Financial planning businesses are moving further towards charging in the areas where their clients really appreciate value, and that is where they can see that their particular goals and objectives are being addressed and dealt with.
Many advisers’ businesses are being meaningfully restructured to meet the new RDR requirements. They need to ensure that there is a team of properly qualified and skilled individuals to deliver the services their clients will come to expect. This is likely to involve the use of paraplanners providing technical support to the advisers. These paraplanners may also be available for clients to contact should the adviser not be available. Expect changes in the use of technology as well, with investment platforms at the centre of most portfolio management services, as well as more sophisticated, effective tools to help work out clients’ investment risk tolerance.
Smart investors will see that cost should not be the primary driver when it comes to getting advice. These investors will recognise the value of the professional services that they are receiving, they will trust the firm and the people they are working with, they will have a meaningful financial plan to work towards, and they will recognise that they can deal with financial issues as they become due. These investors will be happy to pay for quality financial advice in exchange for peace of mind in knowing they are on track to get what they want out of life. The will acknowledge that the adviser is sitting on the same side of the table as them and clearly putting their interests and goals first. They will also appreciate that there is a cost for this professional service but that in most cases, the value far outstrips the cost.
The Institute of Financial Planning is hosting 'Financial Planning Week' from November 26 - December 2, 2012.
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