The IFAs that are still allowed to take commission
The industry and the regulator have been giving a clear message that independent financial advisers (IFAs) are no longer able to receive commission set by product providers for advice provided after 1 January 2013, the start of the Retail Distribution Review (RDR). This has been heralded as a great move that will bring clarity to charges and benefit customers. But there is a worrying loophole in the rules that some IFAs are using to keep business on the old commission based structure.
Take the example of my father. He recently asked his IFA about the new charging structure as he was puzzled why he hadn't been asked to pay a fee for advice. But he was told: "Don't worry about that. It doesn't apply to you because you started with me before 1 January 2013."
I checked this out and found that advisers are still able to receive commission in certain circumstances on business that was in place before 1 January 2013.
An IFA can receive commission on investment products if there is a clear link between the commission payment and an investment made by the client following a recommendation made on or before 30 December 2012.
If the client reduces his investments, the IFA can continue to receive commission.
However, if the client makes additional investments, the new advice can only be paid for through adviser charges and not through additional commission. For example the client has an investment of £10,000 and is advised post RDR to pay another £10,000 into the investment. Trail commission can continue to be paid on the original £10,000 but the new advice can only be paid for through adviser charges, with no additional commission on the new investment.
Alan Steel, chairman of Alan Steel Asset Management is one of the experts we use on the IC reader portfolio reviews. He says: "What's worrying is your dad is being told it's OK because his plan is pre-RDR, so it doesn't matter. That's not true. If he's to stay on trail commission and the IFA has no intention of moving him to adviser charging , then that means there will be no changes made or recommended re his current investment funds... ever. And given RDR came in last year, there's been no advice given since then it seems. Any changes made and trail commission stops. So this can mean he's paying charges for nothing."
I'm also worried that he may be paying too much. He's reluctant to leave his IFA as he feels that he has "built up a good relationship over the years". But liking an adviser is not a good enough reason to stay if you are getting a poor deal.
The next problem is where to turn to get a good deal on advice.
Research from the Association of Professional Financial Advisers into the cost of independent financial advice on retirement income found that 67 per cent of advisers charge a percentage of your pension pot, with the average charge being 2 per cent. That would work out as a £6,000 fee for advice on a £300,000 pension pot. By contrast 28 per cent of advisers charge a flat fee for pensions advice, with the average fee being £681.
Some charge hourly fees. An APFA survey in summer 2013 found that the average rate for independent financial advice was £156 per hour. But paying per hour makes it difficult for investors to judge what they are paying for. And you won't know in advance how may hours you are going to be billed. Also, who is giving the advice and how good or experienced are they?
Percentage fees seem a sensible way to pay. But 2 per cent is too much, particularly if you have a large portfolio. Many decent financial advisers charge much less. Mr Steel says he stayed at 0.5 per cent for existing clients pre RDR and 0.6 per cent for new.