Poor financial advice can have disastrous effects on consumers. A new system, known as the Retail Distribution Review (RDR), should deliver improvements for anyone seeking advice.
Higher minimum qualification standards
From January 2013, financial advisers must be qualified to at least level four of the Qualifications and Credit Framework (QCF), equivalent to the first year of an undergraduate degree.
If you’re looking for an adviser before 2013, you should still insist on this level of qualification as the current level-three minimum is roughly only equal to an A-level.
Enhanced status disclosure
From 2013, many advisers who are currently tied to a limited range of products, including those working in banks, are likely to be renamed ‘restricted advisers’. They will require the same minimum qualifications as other advisers, but will not have to offer products from the whole market. Which? wants to see a clear distinction between truly independent advisers and those selling a limited range of products.
Changes to fees and commission
Under the new rules, advisers won’t be able to receive commission set by product providers. This means advisers must set their own fees based on the service they provide, not according to the product provider selected. This should help ensure that financial advisers recommend the best course of action for you, not the one that pays them the most commission.
Under the new system, the consumer can either pay a fee directly to the adviser or instruct the product provider to deduct client-agreed fees from the investment or premium and pass them on to your adviser.
Trail commission (where your adviser continues to receive commission for every year you hold a product or insurance policy) will be banned on most new products. Ongoing charges will only be permitted where an ongoing service is provided (except for advice on regular contribution policies). Trail commission will still be allowed on products purchased pre-RDR.
A word of warning on the RDR
It’s important to ask your IFA how they’re preparing for the RDR in January 2013. Recent FSA research suggests that around one in five existing IFAs plans to leave the industry before the end of 2012.
Adam Price of IFA comparison website VouchedFor.co.uk warns that any ‘unscrupulous’ financial advisers planning to exit the advice market prior to the RDR deadline could seek to maximise the commission they earn pre-RDR by encouraging their clients to switch investments, known as ‘churning’, even where this is not in the consumer’s interests.
Price commented: ‘With so many IFAs planning to leave the industry in the wake of the regulation another storm is brewing in the shape of a potential mis-selling spree as those exiting seek to increase income prior to the deadline.
‘Consumers should protect themselves from potential mis-selling by seeking an IFA who already holds a qualification on the FSA’s “Level 4” list and who is willing to be paid a fee rather than earning commission on what they sell.’