It may seem like only recently when advisers did not charge their clients for their services exclusively, and could get commission from providers instead.
But it has already been seven years since the Retail Distribution Review - introduced in 2012- changed the way in which advisers were paid for their services.
RDR gave birth to adviser charging, a new feel model under which advisers were no longer paid commission and instead they recovered their fees through charging clients directly.
So how and why adviser charging come about?
Ricky Chan, director and chartered financial planner at IFS Wealth and Pensions, says: “Adviser charging (facilitation by the platform/product provider) came about as a direct result of RDR, which banned commission payments from investment and pension products to regulated financial advisers.”
He adds: “An adviser charge is an agreed fee for a professional advised service – it can be paid directly by invoice or facilitated through a product provider. Hence, regardless of how the fee is paid, it is a cost borne by the client.”
The RDR was launched by the then Financial Services Authority, in 2006.
The reforms were intended to make the retail investment market work better for consumers.
The rules led to a rise in the minimum level of qualifications required by advisers, improved the transparency of charges and services and removed commission payments to advisers and platforms from product providers.
It also led to advisers having to disclose to their clients whether they are “restricted”, or “independent”. The latter means that they are able to recommend any provider in the market, while the former means the adviser can recommend the services of a limited number of providers.
Jeannie Boyle, director and chartered financial planner at EQ Investors, explains: “The RDR changed the rules about how financial advisers describe their services and the way they are paid for them, with the aim to achieve a better experience for consumers.”
The need for adviser charging
Ms Boyle highlights RDR has resulted in the following consequences:
- Transparent charges: the RDR wanted to remove the potential for any commission bias from any advice given by advisers.
- More professional advice: one of the successes. Advisers are now required to hold a higher level of qualification to ensure a consistently high quality of advice for clients.
- Clearer services: so consumers understand explicitly the type of advice offered, be it independent or restricted.
The FCA has outlined a number of things it expects advisers to comply with under adviser charging, in its factsheet.
So why did the UK regulator want regulation such as RDR?
Alastair Lewis, senior business development manager at Blackfinch, says: “[Adviser charging] was part of work to regain trust and consumer confidence in financial advice, which had been lost through, amongst other things, the pensions mis-selling scandals of the 1980s and 1990s.”
This view is shared by other experts.
Mr Chan says: “The FCA’s predecessor (FSA) were unhappy with certain elements of the retail investment market and the way products were designed and distributed, such as opaque product charges, poor consumer outcomes from commission payments mis-aligning advisers’ interests, and low professional qualifications and testing.”
Gemma Harle, managing director of Intrinsic’s financial planning and the mortgage network, says: “The majority of these rules were required to be implemented by the end of 2012, with rules in relation to platforms taking effect from April 2014."