A quick and simple guide to the Retail Distribution Review from Generation Financial Services
WHAT IS THE RETAIL DISTRIBUTION REVIEW (RDR)?
You may not have heard about it yet, but the way that financial advisers run their businesses, and how they provide services to you and other consumers, is changing.
From 31 December 2012 the Retail Distribution Review (or RDR for short) will be coming into effect, and it’s important that you’re aware of it and understand how it may affect UK consumers.
Put simply, RDR is all about increasing the level of transparency offered to consumers who seek out financial advice and are looking to buy financial products or services. So, whether you’re looking for a pension, tax advice, individual savings account or any other form of investment, then RDR will have an impact on you.
WHAT IS RDR LOOKING TO ADDRESS?
When launching RDR, the Financial Services Authority (FSA) had three objectives. They wanted to ensure that advisers have a transparent and fair charging system for the advice they give. They also wanted consumers to have a clearer understanding of the products and services they sign up to. Finally, they wanted to determine that consumers only get advice from highly respected (and qualified) professionals.
SO HOW WILL RDR ACHIEVE THESE AIMS?
- Firms that offer financial advice must explicitly disclose and separately charge clients for their services.
- Firms must accurately and clearly describe the advice and services they offer as either ‘independent’ or ‘restricted’.
- Individual advisers must adhere to consistent and raised professional standards, including signing up to a code of ethics.
We’ll explain these key points, and what they mean to you in more detail throughout this document. You can also visit the FSA website for further information and a free booklet:
CHARGING FOR ADVICE
Whatever product or service you are looking to buy, you want to make sure that you know exactly what you are paying for.
Whatever your level of knowledge of financial products, the new RDR rules on charging for advice are designed to make the process of purchasing investment products and services much more transparent and easier to understand.
The new rules mean that any firm that is qualified to give investment advice (this includes banks, financial advisers, stock brokers and product providers) is required to:
- Set out their own charging structure, based on the level of service they are able to provide.
- Disclose these charges to clients upfront, offering a price list or tariff.
- Make sure that if they charge an on-going fee for a product, that they continue to deliver an on-going service.
FLEXIBILITY ON CHARGING STRUCTURES
The FSA is keen to make sure that charging structures remain flexible and that as many people as possible have access to quality, affordable, financial advice. So, advisers are responsible for setting their own charging structures, which could include charging an hourly rate for advice, a fixed one-off fee or different levels of charges depending on the services required.
The important point here is that clients are aware of the costs involved with the advice and services they require, and know what it is that they are paying for before they enter into any agreement. But when it comes to financial advice to individuals there shouldn’t be a ‘one size fits all’ approach. Advisers are therefore likely to offer different levels of pricing for the different services they provide, and investors can choose the option that best suits their needs and their budget.
IS MY ADVISER INDEPENDENT OR RESTRICTED?
For too long, lines have been blurred between what was or wasn’t independent financial advice.
Over time, this has led to concern that some advisers may have called themselves independent, but either had a bias or preference towards certain products or companies, or were accused of being financially motivated to make recommendations that were not in the interests of their clients.
From next year, advisers will have to tell their clients and potential clients whether they offer independent or restricted advice. And there will be very clear distinctions between the two.
INDEPENDENT ADVICE: DEFINITION
An adviser who wants to use the term ‘independent’ must:
- Be able to consider and recommend products from the ‘whole of the market’, not just from a few select product providers.
- Provide unbiased and unrestricted advice, after fully researching and analysing the relevant market, and offering evidence to back up their recommendations.
- Inform clients at the outset that they are able to provide independent advice.
RESTRICTED ADVICE: DEFINITION
If an adviser offers advice on products from a selected number of providers, or only considers certain types of investment products, then they don’t look at the ‘whole of market’ and are therefore described as ‘restricted’ instead of independent.
The adviser will need to point this out to a potential client at the first meeting, and explain the reasons why the advice they offer is restricted.
So which designation is better? That’s harder to answer. Some people may consider the term ‘restricted’ to have negative connotations, but it doesn’t imply that the advice from a restricted adviser is inferior to that provided by an independent adviser. The FSA simply wants to make sure that consumers know the type of advice they are getting from the outset.
The FSA has also been quick to point out that whether providing restricted or independent advice, all advisers must demonstrate the same level of professionalism and transparency on charges, and they must ensure that their recommendations are suitable for the client.
INVESTMENT ADVICE FROM A QUALIFIED PROFESSIONAL
Another key measure of adviser professionalism will be improved qualifications for all advisers before they are allowed to give financial advice.
From 31 December 2012, advisers will be required to:
- Subscribe to a code of ethics
- Hold an appropriate qualification, and undertake ‘gap-fill’ to plug any missing areas
- Carry out at least 35 hours of continuing professional development a year
- Hold a statement of professional standing from an accredited body
Although it is fairly likely that most advisers will have covered off the necessary topics required to give financial advice over the years, advisers now need to make sure that they are able to prove it, and hold completed records of any continuing professional development.
Once advisers have had their approved qualification (and completed gap fill record) verified by their accredited body, they will be issued with their Statement of Professional Standing (SPS), which they must have before the 31 December 2012 deadline.
These standards will be maintained and enforced by the FSA, and if existing advisers do not meet the new standards they will not be able to make personal recommendations to retail customers from 31 December 2012.
SO WHY SHOULD YOU PAY A FEE FOR FINANCIAL ADVICE?
The honest answer to this is that you already do pay for financial advice; you just may not know that you do.
Financial advice, and the products recommended by advisers are never free. Traditionally, the commission that advisers received for the investments they recommended was funded from investments you made, or the premiums you paid.
One of the improvements that RDR will introduce is to get rid of these ‘hidden’ costs and eliminate any confusion or misconception about how advisers are paid. Taking away commission as an option for clients will also remove any temptation to recommend products that may not be best for the client, but pay the highest amount of commission. If your adviser is paid by you, rather than the company selling the product, there’s much more certainty that the adviser is acting in your best interests, not their own.
RDR is all about making sure that advisers’ are fully qualified to give their clients the very best service. The clients, however, also need to understand that they will, from now on, need to pay a fee for this service.
Many people will opt to take the DIY approach by trying to manage their own financial needs, but if you don’t know what you’re doing, this could prove to be a costly mistake. When it comes to taking care of your money, it’s wise to trust the professionals, and get them to do the hard work of finding the right product on your behalf.