A CROSS-party group of MPs warned this week that poorer consumers are facing an "advice gap" when commission pay-ments to advisers are outlawed early next year.
They were backing a report by the International Longevity Centre, which says that by 2017 there will be 370,000 people reaching retirement with a pension pot of £2000 or less, who will be denied access to financial advice unless the Government clarifies what sort of free information or guidance will escape the strict definition of "advice" which must be paid for.
Most consumers did not know it, but there is a revolution afoot in the world of financial advice.
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After the implementation of the Retail Distribution Review (RDR), all investment advice will have to be paid for through fees.
For some investors, the change will be good news because the cost of investing will become clearer, and charges are expected to go down. Already investment groups are reducing the costs of some of their funds. However, for smaller investors getting independent advice may become too costly.
Research by Skandia, the investment company, found nearly 60% of independent financial advisers believe the proposal will have a detrimental impact on their customers who they believe may be unwilling to pay a separate charge for advice on existing products.
Damien Paterson, of Glasgow-based independent financial advisers Paterson Financial Planning, says: "RDR has some good points but there are some aspects that have not been thought through. If it gets rid of 'commission-hungry' salesmen and results in advisers with better qualifications that's a good thing, but sadly I think some people will miss out because they will not be able to afford to pay for advice. The rich will get richer and the less well off will be left behind."
Already the high street banks are gearing up for the new regime. Barclays has withdrawn from giving financial advice in its branches, reserving it for better-off customers through its Barclays Wealth arm, after some well-publicised mis-selling episodes were punished last year by the regulator.
Now Lloyds Banking Group is also to reorganise, separating its investment advisers (who now need better qualifications) from people who are allowed to sell only protection products.
The cost of independent advice will vary. A survey by Which? found charges for the same work varied wildly across the country, with fees of £200 an hour not uncommon. The ILC however says a survey of 1020 advice customers in early 2012 found customers were prepared, on average, to pay £39 per hour for advice, excluding about one in five customers who would not be prepared to pay for advice at all.
Jeffrey Deans, managing director of advisers Save & Invest in Glasgow, says: "One problem is no client really understands the amount of work that goes on before we can start giving advice, it costs us at least £700 to £800 per client."
However, Mr Dean says his firm is working on technological solutions which will allow clients to upload their own data so he can offer them an advisory service at a lower price. However, he admits it will not be economical for someone with £10,000 to invest in an Isa to pay for advice. He says: "They are likely to end up having to use some kind of decision tree."
Banks are expected to pick up more business, although they approach RDR in different ways. Barclays is developing a platform for DIY investors. At Lloyds, salesmen will still be able to receive commission on protection policies, such as life insurance. The investment advisers will have to charge, but will only advise on the group's own products.
A spokesman for Lloyds said: "Charges haven't been fixed yet but they will be lower than independent financial advisers."
Last year there was a suggestion from accountants Ernst & Young that banks would have to charge clients £200 an hour after RDR. Investors who want to receive advice this year can still get it without paying an upfront fee, although they will still of course be paying through the commission deducted from their product charges. Advisers will be able to continue receiving the annual renewal commission on this business, as with other products sold in the past.
However, if any new advice relating to existing products is given, such as advice to top up a pension or switch to a different fund, it will have to be charged for.
An exception has been made for ongoing advice on the investments underlying life insurance products, which could lead to a last-minute surge in investment bond sales.
The Investment Management Association representing fund managers, however, has expressed its disappointment. Julie Patterson, of the IMA, says: "This will lead to distortions in the marketplace, about which we have consistently raised concerns."
Even investors prepared to pay fees could find it more difficult to get independent financial advice. Surveys have indicated up to 40% of advisers may leave the industry because of the change to fees and increased regulation. Mr Paterson says "Some advisers are happy about the situation, others have had enough. My feeling is there will be consolidation and around one-third of IFAs will quit."
Some independent advisers may decide to start offering restricted advice about just a few companies' products.
Fraser Donaldson, of financial research company Defaqto, has pointed out: "The FSA has made it clear independent advisers need to consider all retail investment products that are capable of meeting the needs of the client. This is quite a commitment and will mean independent advisers have to invest in research, or outsource this aspect of their business. However, an adviser offering restricted advice can limit themselves to the products of a single company, single group of companies or a limited group of companies."
Consumers unwilling to pay for advice are expected to undertake more do-it-yourself investing. Life insurers such as Legal & General are gearing themselves up for more direct business from the public and a growing number of investment "platforms" are being set up to make it easier for investors to buy funds without advice.