Fears that commission reforms will lead to advice 'wasteland'
Plans to force flat fees and qualifications on independent financial advisers could end in many quitting the industry, leaving consumers stranded
Sunday 31 July 2011
Taking out a mortgage on your home, finding the right pension plan or sorting out a savings account for your children are all areas where you shouldn't take any risks, so seeking out an independent financial adviser (IFA) who can help you to sort through all the different deals is supposed to be the best play.
However, if your adviser is more concerned with securing themselves a bumper commission rather than finding you the best deal, you might find yourself mis-sold and, on top of that, you could be paying your IFA commission for the privilege.
Successive mis-selling scandals from personal pensions and endowments to the more recent high income bonds have all had one common denominator: the payment of commission.
Currently, if you buy a product from an IFA you have two options: you can either pay a fee for the advice, or the adviser can receive commission on the product you take out. This means that if an adviser has two more or less identical financial products but one gives them high commission, then they're far more likely to push that one, which can lead to the supposedly independent advice you receive, being biased.
But this is meant to change. From the start of 2013 the Financial Services Authority is implementing its Retail Distribution Review (RDR). From then on IFAs will be required to have qualifications that are equivalent to a certificate in higher education, for example, an NVQ at level four or above. And most importantly, the changes will also end commission; instead, customers will pay a set fee for the advice they receive.
Although it agrees with the changes, the powerful Treasury Select Committee recently sparked controversy by calling for a 12-month delay to RDR. The chairman of the committee, Andrew Tyrie MP, said that the changes risked "putting large numbers of experienced financial advisers out of business". The call was lambasted by consumer groups and rejected by the FSA almost as soon as it was made.
In particular, the fear among MPs and others is that some experienced advisers will simply refuse to retrain, deciding, more than likely, to retire.
No one is sure precisely how many advisers are set to leave the industry or have already departed. Back in 2007, the insurer Zurich estimated one in 10 could go, a figure also parroted by the FSA, but that now may be underplaying things.
The head of product sales at one of the UK's big five banks told The Independent on Sunday that they were working on the premise that as many as a quarter of all IFAs will cease to trade either prior to the RDR changes or soon after. Another major concern is that, with the banning of commissions, large numbers of IFAs are going to focus on those with the deepest pockets. They would morph from IFAs dealing largely with clients among the professions and everyday life into wealth managers with a few very wealthy clients.
In effect, what may well happen is that a wasteland of advice is created with fewer options for those on middle incomes and with more everyday ambitions such as what to do with their retirement savings pot. They would have to rely on bank and insurance sales staff for advice – a potential path to mis-selling.
Stephen Gay, the director general of the Association of Independent Financial Advisers (AIFA), believes that the RDR will result in advisers leaving the industry. He said, "There will be two tranches: people who leave – who won't be able to trade as they will not have the required qualifications – and those who, over a longer period of time, find it more difficult to work with transparent, non-commissioned-based charges."
The reduction in IFAs will no doubt have an effect on those needing advice on decent but affordable financial products, and the introduction of upfront consumer fees, may prove too difficult for some people to fund.
Mr Gay suggests that with or without the delay, the industry will experience a slight U curve in the number of people working in it, with a drop expected after the RDR officially comes into use in 2012. When asked how many financial advisers he expected would leave, he said, "The FSA's suggestion of about 11 per cent seems accurate, although it will be more difficult to tell over a sustained period of time."
This means that the RDR, whenever it is introduced, will potentially bring a significant lack of qualified, keen advisers who are able to provide a service that is fully equipped to deal with the demands of the financially strained middle classes.
"AIFA is supportive of the principles and objectives of the FSA, as it is important for the customer to understand clearly what they are getting and what they are paying for," said Mr Gay. "However, even the best of reforms can go wrong if they are badly implemented, and any delay would help those who are close to achieving their qualifications but can't quite manage it by the deadline."
But Adam Phillips, the chairman of the Financial Services Consumer Panel (FSCP), disagrees. "Over the past four years, independent financial advisers have already taken steps to meet the qualifications required by the RDR, with nearly half having already obtained the appropriate qualifications, and with at least 90 per cent having achieved the required standard by the 2012 deadline."
Any delay, Consumer Focus warns, could lead to some IFAs indulging in sharp practices by selling products prior to December 2012 which pay bumper trial commissions (in effect, payments that carry on for the term of a policy or pension plan which can be 10, 20 or even 30 years).
"We are concerned that some IFAs might be trying to build up trial commissions in the run-up to the implementation of the RDR. Delaying RDR could leave more consumers paying ongoing annual fees to their financial advisers," a Consumer Focus spokesperson said.
Independent Partners: See how much you could save by switching credit cards. Compare now
Geoffrey Macnab does not like the comedian's big screen debut
Look beyond the usual shows for the best festive telly
The battle for control of Stieg Larsson's £30m legacy
- 1 Bonuses for goals and top four finish as Luiz Suarez joins Premier League's top three earners
- 2 Sun will 'flip upside down' within weeks, says Nasa
- 3 #Teamnigella: It’s the only side to be on
- 4 Christmas comes early: Justin Bieber is 'retiring from music'
- 5 Burglar steals video tapes of child abuse, hands them into police
- < Previous
- Next >
iJobs Money & Business
£Negotiable: Citifocus: High calibre individual with institutional client serv...
£120000 - £150000 per annum: Cornwallis Elt : Programme Manager, Strategy Lead...
£55000 - £120000 per annum: Pro-Recruitment Group: The Financial Services Tran...
£600 - £700 per day: Harrington Starr: Client based in West London is looking ...
Day In a Page
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.