Reforms to financial advice – useful links, opinions and guides

18th December 2012

The way in which you will pay for financial advice is changing from 1st of January. Advisers have also been required to become better qualified if they wish to continue advising.

Under a reform brought in by the financial watchdog, the Financial Services Authority, with the catchy name the Retail Distribution Review (RDR), the minimum qualification an adviser must achieve before they can advise has been raised substantially while commission payments will be banned on new pension, mutual fund and other investment recommendations.

Many advisers have spent the last couple of years either passing more exams or at the very least filling in gaps in their knowledge, which they must then demonstrate to a professional body to receive a ‘statement of professional standing’.

This may sound a bit complicated, but what it means is that your adviser will have had to beef up their knowledge and update him or herself on the latest thinking about advice. The gap filling requirement applies even if your adviser was already well qualified.

However arguably the biggest change is that commission will be banned from the start of the New Year on new sales of investments and pensions. Insurance such as income protection and critical illness will still pay commission and funds which your adviser has recommended before the year-end may also still continue to pay a trail commission – usually around 0.5 per cent.

For new advice however, there will be a different charging regime where you must agree to the charge. This is referred to as an adviser charge or customer agreed remuneration. It may involve you writing a cheque to pay your adviser an hourly fee but the charge can also be ‘facilitated’ through the product.

What this means in plainer English is that when you invest into a fund, a pension or portfolio, a fund manager, pension firm, insurer, wrap platform or fund supermarket may then pay your adviser's fee – all with your agreement of course.

You might agree to pay your adviser a retainer perhaps as a percentage of funds under management for which your adviser will agree to give you a certain level of service and advice. This can also be ‘facilated’ under adviser charging.

The whole idea of the reform is that it breaks the link between a provider of products and the adviser, thus removing the suspicion of bias in the recommendations and of fund managers and pension companies trying to ‘buy’ market share by paying high commissions.

The change will also see a new class of adviser known as a restricted adviser who may recommend from a more limited range of products, while independent financial advisers are required to demonstrate that they are recommending from across the investment universe and at least researching and considering products such as investment trusts and exchange traded funds.

One downside is that consumers may be reluctant to pay for advice under the new system or may find that their adviser insists on them having a reasonably high level of investable assets before they will advise you. Previously the commission system could make it feel as if the advice was free, though most commentators and consumer advocates argue that the consumer or client always paid eventually perhaps through higher fund charges.  

There have been warnings about an advice gap. Certainly very many high street banks have pulled out of giving financial advice to all but their wealthiest customers, though there have always been concerns about the quality of advice on offer through bank salesforces.

More investors are expected to adopt an execution-only strategy, where they equip themselves with information and then select funds themselves usually bought from a fund supermarket. Even in this instance, most fund supermarkets take some commission, though usually at a much lower level. Even this form of purchase may face a shakeup next year though we will return to discuss the implications of that in a later article.

For now, here are a few links useful links.

Many money and consumer journalists are very big fans of the reforms. Some advisers have not been so keen and say they either have had to stop advising altogether or will driven up market and have to turn clients away.

Some journalists give this argument short shrift such as Gavin Lumsden in this video guide to the reform on

The Guardian’s personal finance editor Patrick Collinson wrote this strongly worded article this weekend, with lots of very useful information on the cheapest charges especially if you are an execution only buyer.

This is a guide to the new approach to financial advice produced jointly by pension firm Standard Life, adviser search website and two professional bodies, the Personal Finance Society and the Institute of Financial Planning.

The financial watchdog, the FSA has also published a consumer guide called Financial Advice changes 1-2-3.

Both are equipped with some good suggested ideas for questions to ask your financial adviser.

This is a pretty revolutionary reform. Fund firms, advisers and maybe even regulators are not quite sure how things are going to turn out. For example new ways of paying for advice and even new styles of adviser may emerge.

But in the meantime, here is a list of a few things you might consider when you talk to your adviser.


  1. You should satisfy yourself about what you are paying for, how you are paying for it and what services you are getting in return including any charge you are paying for a wrap or platform. If you are, for example, getting the lowest tier of service, you may want to ask is it enough to satisfy your advice needs. You also need to consider the VAT position if the advice doesn't relate to a specific product though your adviser can help explain what may or may not attract VAT. 
  2. Do you want to become an execution only client? There are a lot of sources of information that can help inform your investment decisions. It is Mindful Money’s view though, that if you have a thorny advice problem, it may be wise to seek professional help.
  3. You may wish to ask your adviser what additional qualifications they have and how this helps them better advise you.
  4. You might decide to become a mostly transactional client and pay for specific advice at specific times and your adviser may be interested in structuring their service around these needs.
  5.  If you adviser is becoming restricted you might ask his or her rationale for deciding to restrict and if the products, pensions and portfolios they have decided to offer, definitely meet all your investment needs.
  6. You may ask your adviser how commission that may still be being paid on your legacy funds, recommended before January fits into the new way of charging. And remember protection products still pay commission.

The reform starts on 1st January. There have been a lot of arguments about whether it brings much needed change or over-regulation. But it is intended to ensure you receive a better outcome when you seek the help of a financial adviser. And if you are told that one adviser cannot service you because you don’t have enough spare to invest, we suspect plenty others will take your business.

Mindful Money will keep you updated as things develop.


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