The end of ‘free’ financial advice, following a review by the FSA, could make it harder for those with moderate savings to get help.
The changes, which follow the Financial Services Authority’s retail distribution review (RDR) and come in on 31 December, are designed to make the cost of advice more transparent and to help consumers have a better understanding of what kind of service they are being offered.
One of the key measures is to stop the payment of commission on the sale of investments and pensions, which has subsidised the advice offered by a number of providers, including some of the large banks. It has enabled them to seemingly act on a “free” basis for clients, but the charges were then deducted from investors’ funds each year, having a huge impact on eventual returns.
Analysis by the FSA before it launched its review suggested consumers were losing £43m a year because of advisers, driven by commission, encouraging them to switch pensions.
As a result of the controversy surrounding commission, customers who want to take advice from January onwards will be charged a separate and transparent fee. However, the changes will make it harder for mass-market financial sales forces to offer advice to people with moderate savings.
Now several high street banks have decided to focus their services on wealthier consumers who are more likely to be willing to pay, and have made hundreds of commission-based advisers redundant in advance of the changes.
“This is likely to limit access, especially on investment products such as equity Isas, trusts and bonds that people typically buy from their banks through advisers,” says Prashant Vaze, chief economist at Consumer Focus.
Customers who may previously have been invited in for a free review of their finances now need to proactively seek advice – either from an independent firm, or one of the few banks and building societies who have chosen to operate under the new rules.
Among the banks that have culled their financial adviser workforces are HSBC, RBS and Barclays.
HSBC will continue to offer investment advice to its Premier customers (to be eligible, you need to earn £100,000 or have £50,000 in savings or investments with the bank) and has developed an execution-only (no advice provided) online fund supermarket.
The same is true of Barclays, which made the decision to move away from offering advice to all customers back in 2011. It still offers a financial planning service to high-net-worth customers, but the mass market is directed towards the online service Barclays Investments, which does not provide advice.
Nick Cann, chief executive of the Institute of Financial Planning, says that it is unlikely that online services will fill the gap for many consumers, and that those who have simple advice needs could struggle to find help.
To prevent an “advice gap”, a key objective of the FSA’s review was to improve access to financial advice. This objective has been dropped.
“I’m afraid that has quietly gone away, which is a real shame,” says John Wilkinson, head of protection and investments at Nationwide building society. “I’m left with a feeling that fewer people are going to get the advice they need, post-RDR.”
A spokesman for Lloyds Group says RDR “has inadvertently created an advice gap for the mass market”, and Vaze says that, while it will address the problem of “product bias” where a deal offering more commission may be pushed, it “is not so strong on widening access”.
“It’s important that the regulator and industry come together and design a low-cost simple advice system which is accessible for everyone regardless of income, or the amount to be invested,” says Vaze.
However, the Financial Services Authority says it is confident consumers will still be able to access advice. It has said organisations can offer simplified advice, which will be more automated, maybe delivered online or by phone, focusing on a customer’s immediate need rather than looking at investments they already own. It is not clear whether any companies will offer this, however.
She adds: “If the results of the review mean that more middle-income customers go to their local IFA, we don’t see that as a problem.”
Those who have bought investment and pension products before the implementation of the review changes, could be in the worst position of all. Their investment provider will continue to pay “trail” commission – money paid every year to the firm that originally arranged the product’s sale, to ensure it continues servicing the client. But the firm may no longer be providing advice on a commission basis so they could be paying for something they can no longer receive.
Customers who do want advice will be able to get it on the high street. Nationwide and Lloyds have stated their commitment to providing a service to all customers post-RDR.
Under the new regime this will, however, attract a fee. Neither organisation is yet willing to say how much, but Nationwide has stated that rather than charging upfront it will allow customers to pay the fee alongside any monthly investments they make.
Paying the price
It is not clear how much advisers will charge once the new rules are in place, but it could be enough to make you think twice if you only have a small sum to invest.
Research by Which? in January found independent financial advisers were quoting an average £356 to help someone transfer a £10,680 investment into a stocks and shares Isa.
If you do plan to get advice, here is how you can keep the cost down:
■ Shop around. Which? revealed that while two IFAs quoted just £106 to help that Isa investor, one quoted £2,500. Get quotes from the high street and from IFAs
■ Sort out your paperwork before you seek advice. If an adviser is charging by the hour you will save yourself cash by doing some of the legwork in advance. The adviser won’t have to spend time finding out how you are fixed, or chasing up details
■ Ask if you can pay in instalments. This will not reduce the overall cost, but will make the upfront cost easier to cope with.