When looking for the right financial advice, cost is one of the key factors for most people. Good financial advice will cost you money but when it comes to taking advice on your finances it could be the best investment you make. Kim Barrett explains.
Last year saw a massive shakeup in financial services called the Retail Distribution Review (RDR). It had a radical impact on financial services industry and all individuals who work within it.
RDR made it clear how much consumers pay for financial advice and meant that advisers needed to invest in higher qualifications. It now means only advisers who meet the higher professional standards will be able to give advice.
“Would you approach a double glazing salesman for advice about a washing machine?”
And from 6 April 2014 these changes also apply to the execution-only investment world, so all charges relating to ‘new’ investments must be made in a clean and transparent manner.
The implementation of the new rules surrounding RDR have many, many, ‘knock on’ effects. Fees generally attract a VAT charge in all walks of life. But there is an exemption where fees are incurred with regard to the setting up of a financial services product, and the ongoing managing of it. How long this remains we shall see!
What are ‘clean share classes’?
It is because of RDR that there will be a move to the operation of so called ‘clean share classes’, where any distribution of a commission charge on any unitised funds will be stopped. This must take place by 6 April 2016, but the financial services industry is moving very quickly on this issue and at some stage in the not too distant future all of the funds in which pension and investment assets are held will be within ‘clean’ share classes. Bizarrely ‘clean’ share classes do not necessarily in the short term levy cheaper fund charges, although that is ultimately the intention.
The first stage of clean share classes
The first stage of the change to ‘clean’ share classes was implemented on 6 April 2014 and from this date any new investment made into a pension, or investment, plan whose assets are held in a ‘unitised’ fund, which will include any switch of funds, will be into share classes where a cash rebate from the charges made can no longer be effected. Instead any rebate made will be in the form of a rebate of units which it is likely to be made into an alternative cash, or gilt fund.
No more commission
From 1 January 2013 any financial adviser engaged to provide advice upon any pension, or investment, plan can only be remunerated by charging directly for their engagement. No longer can a commission be paid. Commission can still be the favoured remuneration for any protection products arranged such as life assurance. Any existing pension, or investment, plan in operation prior to 31 December 2012 on which a commission payment is currently paid can continue, but advice is taken about this product after 1 January 2013, then the ongoing commission payment will be stopped to the appointed financial adviser.
Different fee strategies are being adopted by financial advisers and commonly include, a fixed payment for work undertaken, a fixed annual fee payment for ongoing engagement, a fixed monthly fee payment for ongoing engagement, an hourly charge, and a fee proportionate to the size of pension, or investment, asset managed; and both a higher initial charge, and a much lower ongoing charge can apply. All financial advisers are obliged to provide a tariff of charges and any fee that a financial adviser may charge for work subsequently undertaken must be agreed with a client prior to the engagement.
When looking at fees charged proportionate to the size of pension, or investment, assets managed many financial advisers in recognising they do not possess the investment expertise to manage the assets will by default appoint an outsourced discretionary fund manager. Such an exercise will occasion an addition layer of fees, and a potential disconnect with the management of pension, or investment, assets. In addition VAT will be charged on the discretionary fund management service bringing an additional layer of cost. A common example is a financial adviser’s ongoing fee of 1 per cent, plus a discretionary fund manager’s fee of 1 per cent, plus VAT at 20 per cent, or 0.2 per cent, providing a total charge of 2.2 per cent.
The other fundamental aspect to the implementation of RDR is that all financial advisers need to enhance their qualifications, and ensure they conform to ongoing Continuous Professional Development (CPD). Both of the aforementioned need to be evidenced by obtaining a Statement of Professional Standing (SPS) from a professional body certified by the Financial Conduct Authority (FCA), and the SPS needs to be renewed annually.
At the present time all advisers are required to hold a Level 4 Diploma. However many adviser are enhancing their qualifications beyond this level and becoming Chartered Financial Planners, or Certified Financial Planners. Firms themselves can also gain a Chartered status by adopting very high standards of professionalism, and ethics, in their operation.
One clear point to make to anybody appointing a financial adviser is to ensure that the adviser holds qualifications relevant to the subject matter about which advice is sought. Would you approach a double glazing salesman for advice about a washing machine?
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About the author
Kim Barrett, is an independent financial adviser at Barretts Financial Solutions. He is a Chartered Fellow of the PFS (Personal Finance Society) with 38 years’ experience in the financial services industry. He is also an Associate of the CISI (Chartered Institute for Securities and Investments).
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