This article is part of Morningstar’s special series about the Retail Distribution Review (RDR). It was updated in January 2013, after originally being published in November 2012.
As investors become more aware of the cost of financial advice, many will shun financial advisers and seek to invest on their own, according to a recent survey by Deloitte.
The survey and report, titled “Bridging the Advice Gap: Delivering Investment Products in a Post-RDR World”, estimates that up to 5.5 million disenfranchised customers will choose to stop using financial advisers or be unable to access financial advice.
This shift is being brought about by the Retail Distribution Review (RDR), which is a set of new industry rules that were put in place at the beginning of 2013. The rules stipulate that financial advisers must start making upfront payment agreements with clients instead of taking commissions from investment product providers. These rules were put in place to ensure there is more transparency about fees in the industry, but they could have the unintended consequence of turning investors away from advice because they want to avoid fees.
Clients: Plans to Ditch Advisers
“After many years of receiving ‘free’ advice, or advice which appeared to be free as a result of a commission-based adviser remuneration model, customers are likely to respond negatively to explicit charges for advice,” stated the report.
“Many customers are unlikely to accept adviser charges for the services currently on offer. According to our research, some 33% of UK adults with less than £50,000 in savings, and 32% of those with more than £50,000, indicate they would cease using advisers for all [investment] products if they were charged directly.”
Of those people surveyed who said they would continue to seek out financial advice, many indicated that they would likely cut down on their adviser meetings in an effort to avoid high fees.
Advisers: Plans to Ditch Low Net Worth Clients
But this financial advice gap is not solely caused by reluctant customers. Adviser behaviour is also expected to contribute to widening the gap.
“Independent Financial Advisers (IFAs) and bank advisers are likely to de-prioritise a large proportion of their customers as they move upmarket to defend profit margins. This is based on their understanding that customers with lower levels of savings will be less willing or able to pay adviser charges,” said the report.
The report found that most large IFA firms and high street banks have begun channelling resources towards serving customers with at least £50,000 in investable assets.
