The Retail Distribution Review (RDR) and the requirements relating to adviser charging, has been a significant milestone in the delivery of financial advice.
Since the start of January, you may already have encountered a change in the manner in which work is quoted for. There are several ways in which the advice can be paid for, each of which has its merits and disadvantages, depending on the requirements specific to each client or case.
Where investment advice is being given, it is now a requirement for the adviser to agree with you at outset the amount they will charge you, what you are paying for and the manner in which they will be paid, (something we implemented in 2003). No longer is it permissible for an adviser simply to take commission. It is important to note these new rules do not apply to protection business, where commissions defined by product providers and usually built into the charge structure of the product, are still permissible, though you should be aware of the impact this will have on your monthly premiums.
To help you understand the merits and disadvantages, I have summarized the main two variations and their issues below.
Option 1. Advisers charge a percentage of the amount being invested as it is invested plus an ongoing percentage of funds under management for ongoing service.
Option 2. Advisers charge for initial financial planning work, then charge separately for the implementation of the advice, (assuming you go ahead), plus an ongoing percentage of funds under management for ongoing service.
When analysing these, it is helpful to look at the initial and ongoing services separately.
With regard to the initial work, the option 1 is usually contingent work, whereby the adviser does not get paid unless you proceed with their advice. The advantage of this to you, is there is no cost incurred unless you proceed with the advice. The disadvantages are firstly, the adviser ‘may’ bias their advice to make investing look more attractive than other options which may be as or more appropriate, otherwise they will not get paid for their efforts. Secondly, if an adviser is working on a contingent basis on what is a complex situation, requiring a great deal of skilled and in depth work, they may be inclined to take shortcuts as a precaution of limiting their potential losses if you do not go ahead.
As for option 2, the advantage to you is that, as the planning work is paid for irrespective of whether or not you proceed with the advice, it is far more likely the advice will be both more comprehensive and objective. The down side is the requirement that you pay for the advice, irrespective of whether or not you proceed.
Then there is the matter of the overall charges for the initial advice and implementation. The adviser is now duty bound to agree with you how much they will get paid for the stipulated work, (known as customer agreed remuneration (CAR)). They must also express that fee as a monetary amount, not just as a percentage. For example, if there was £500,000 to be invested, under the first option the adviser may charge a fee of say 3%, (£15,000) of the funds as they are invested, to cover their initial work and the implementation. Under option 2, the adviser may charge say £4,000 for the initial planning advice and, assuming you proceed, 1%, (£5,000) of the funds invested for the implementation of their advice, totalling £9,000. Be sure to ask the adviser to provide you in writing, exactly how much they are being paid and what up front and ongoing service you will be receiving.
Most importantly, it is for the adviser to agree with you, the client, at outset whether these fees should be paid directly by you or whether they should be taken from the investments. In itself, drawing the charges from the investments may be advantageous, as long as this does not result in a compounding effect. For example, if a product provider is paying the fee to the adviser from their own resource on your behalf, it may result in them levying a higher charge or imposing lock in clauses to protect themselves and cover their costs. Thus if their costs are to be built into the investment and paid by the investment manager, you need to know what impact this will have in terms of increasing up front and ongoing charges or lock in clauses.
One would hope most firms will approach this openly and honestly in the spirit of the legislation, though whether some will try to mask the true costs with elaborate wording or aggregated pricing, only time will tell.
What of the ongoing service charge on the investments they are managing, typically, that will vary from 0.35% up to 1.5%. This should be dependent upon the sums invested and the level, frequency and quality of the service being provided, though that is not always the case. You are likely to find some advisers will charge a lot for a very minimalist service whilst at the other extreme, you may find a very good planner who offers an excellent service and undercharges for it. Therefore, you should establish exactly how robust and comprehensive the ongoing service will be and establish the skills and qualifications of those providing this service, as well as the ability of the firm to provide continuity of service in the event of the death, retirement or departure of your adviser.
It would also be prudent to establish their due diligence and disaster recovery procedures. For a high quality, well researched, robust service, with well established continuity plans, takes time and money to put into place and maintain, and needs to be paid for if it is important and appropriate to you. If not, a cheaper more abridged service may be appropriate.
Manse Capital Ltd is authorised and regulated by the Financial Conduct Authority.