By New Year’s Day 2013, recommendations from the Retail Distribution Review will need to have been implemented.
The Review is significant as it will have a major impact on the way in which financial advisers and financial adviser firms do their dealings – or ‘distribute their advice’ – to consumers who are known as ‘retail clients’.
But, what exactly is the Review all about and how will it affect employers? Broadly speaking, the aim of the RDR is to modernise how financial advice is provided in three ways by a focus on improving:
- How charges are applied
- Transparency in the adviser/client relationship
- Ensuring financial advisers obtain higher benchmark qualifications in a bid to ensure consumers’ trust in the industry is regained.
For employers, arguably the most important thing to remember in this context is that these changes will apply to any investment defined as a ‘retail investment product’, which includes personal pensions.
Currently, advice here can be paid for by fees, commission, or a combination of both. While fees, which include the payment of an hourly rate or a set amount for a completed project, are a transparent way to charge either an individual or an employer, paying by commission is potentially more problematic.
The problem with commission…
This is because clients don’t remunerate advisers directly. Instead, advisers purchase financial products from third party providers, which pay a commission to that adviser for their business by deducting a set amount from the sum invested by the client.
Taking this tack has come under scrutiny, however, because, arguably, it increases the likelihood that financial advisers will mis-sell or purchase unsuitable (or too many) products on their client’s behalf as some third party providers offer higher commissions on certain offerings.
Therefore, any individual receiving financial advice privately or via their employer will be affected by the forthcoming changes. Most commonly, such advice is provided by employers in relation to pensions.
What it means, in practice, is that financial advisers will no longer be able to work on the commission model when providing advice and related services about corporate pensions. Included in the mix here are group personal pensions, group stakeholder pensions and self-invested personal pension schemes.
This ban will apply to any new business undertaken after 31 December, 2012. Schemes that are already in existence on or before this date will be able to continue under the commission approach, even if members join the scheme at a later date.
The principles of ‘Consultancy Charging’ will apply for new schemes, however. This means that employers and employees must be given more information about the fees charged for services.
Consultancy charging
Employers and advisers will be able to negotiate over payment levels, but the costs being charged by third party providers must not vary. The idea is that financial advisers should be looking out for the best interests of employers and their staff and so need to set out clearly how any charges will be deducted.
If an employer decides to pay for the advice and services themselves, however, the principle of Consultancy Charging will not apply. This means that they can opt to pay advisers a fee that does not need to be disclosed to personnel.
Advisers, meanwhile, will be expected to follow a strict code of ethics based on the ideas of integrity and treating customers fairly. This includes being transparent about what they can and can’t advise on, how much their services cost and what clients can expect from them.
Likewise before employees sign up to the pension scheme being offered to them, they must also be provided with full details about any potential costs.
Since these costs will be deducted from their pension scheme, it is important to demonstrate the effect that they will have on their pension fund over time, particularly if they are deducted as a percentage of the funds held and will increase as the pot grows.
But ensuring that employees are privy to all of the facts before they sign on the dotted line is deemed crucial if the financial services industry is to regain consumers’ trust again following a series of mis-selling and other scandals.
Will it pay?
Research suggests, however, that if staff were fully aware of the cost of financial advice, they could choose to forego it altogether.
Just under two-thirds of respondents to the Association of British Insurers’ fourth quarter 2010 consumer survey said that they would not be willing to pay a penny for advice on pensions, savings and investments.
Employers faced with meeting costs themselves could take a similar attitude. But the danger with this approach is that staff could be left without access to adequate financial guidance just when they need it most, such as shortly before retirement.
For instance, an Aviva survey of 2,000 UK adults revealed that 43% would look to family and friends for financial guidance, 40% would go online, 26% would ask their bank or building society and only 21% would go to an independent financial adviser.
But the same study found that a staggering 81% of people regretted decisions that they had made about their finances in the past, while a huge 95% said that they felt less confused after visiting an IFA and believed that they had benefitted from the experience.
The fact that a final poll by Standard Life revealed that three quarters of employees would value more help from their employers with financial planning would appear to really put the onus on those employers to get up-to-speed, however – and fast.
Lauren Peters, head of financial education at Money in Mind, which provides workplace financial education.
