I’ve come to realise that it is not easy for the public to seek out a good Independent Financial Adviser (IFA) without some degree of initial apprehension. Quite often potential new clients will explain that their enquiry is tentative and they don’t want to feel obliged in the early stages. Perfectly understandable isn’t it ? Quite often it might be a first time talking to an IFA so they won’t quite know what to expect.
Even when the person has come by way of recommendation from a friend, family or colleague, they will want to feel comfortable that the IFA is going to be able to offer the right sort of help. It is also essential that there is a friendly, but businesslike relationship, and that the parties get on reasonably well.
The world of Financial Services is undergoing constant evolution, as with most things in life. In approximately 18 months time we will all encounter significant changes to the way financial advice is conducted, which will affect both advisers and clients – this is generally referred to as the Retail Distribution Review (RDR).
The FSA outlines the main objectives of RDR as follows:
- Consumers are offered a transparent and fair charging system for the advice they receive
- Consumers are clear about the service they receive
- Consumers receive advice from highly respected professionals
The bottom line is that commission, as we know it, will be banned and clients must know exactly how much they are paying and what they are paying for. Advisers must reach a certain level of competence in order continue their licence and some may need to retire from the profession.
Until now, it has taken many years for the public to grasp an understanding of what is 'independent advice' compared with 'tied advice'. Even so, there is still considerable lack of understanding. Financial Services has already become much clearer in disclosing cost and letting consumers know how much will be paid to the adviser. It is not always crystal clear though how the commission is paid for – ultimately it comes from the investment in some shape or form, usually over a period of time.
Currently clients can agree for the adviser to be paid by way of commission directly from the investment company being recommended, or to pay a fee instead of commission. I think it is fair to say that most advisers are still paid by way of commission, although some work on a pure fee basis.
Under RDR, commission will be replaced by fees, which can be paid from out of the investment or by separate payment by the investor. Either way, it will be very clear from the outset just how much the investor is paying.
In recent years, it has been accepted that there is a standard shape of commission which consists of an initial amount and an annual amount in addition. The initial amount is meant to pay for the advice and the annual amount is to pay for ongoing advice and guidance, along with costs of administration.
The commission figures can vary considerably but usually the consumer should be put at ease if the adviser is charging a fair and reasonable initial amount followed by ongoing annual charges as this model indicates that the adviser is interested in looking after you for the longer term.
Most advisers (including Torquil Clark) are now preparing for the RDR world and placing more emphasis on building long-term relationships and providing added value. This is likely to take the form of providing more in-depth investment management and regular reporting to the client. This level of service should produce better results for the investor in the fullness of time and consequently can justify a higher annual management charge.
We will all be on a pretty steep learning curve when RDR kicks in - advisers and clients alike. It will take time for the public to understand this different approach and it will take time for advisers to learn how to demonstrate the full value of their services.
From the client’s point of view, I think you need to consider:
- Do you want a long-term relationship, or is it likely to be a one-off transaction, for example setting up your pension annuity?
- Is the adviser knowledgeable with a good stable track record?
- Do you like the adviser?
- Are the charges reasonable when compared to the service being offered?
Don’t be afraid to approach an Independent Financial Adviser – most are pretty nice people.
Paul Korobejko is a financial adviser at Torquil Clark. Read more about Paul.