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Paying for Financial Advice

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The Retail Distribution Review (‘RDR’) is going to have a big impact on the market for financial advice. At SWLaw we welcome it and the opportunities that come with it. It is something of a ‘coming of age’ for financial planners and another step on the way to recognition as highly trained, professional advisers. RDR demands higher qualifications of advisers: for some this means updating and upgrading their qualifications if they are to remain in business. RDR introduces a new definition of ‘independent’: advisers, like SWLaw, who choose to remain independent will advise according to a new and wider definition of ‘whole of market’. RDR also means a final break with commissions: no longer can advisers be paid according to the financial products they sell. Instead they will be charging fees directly to their clients.

This last change is perhaps the most significant for financial planners. It removes any question of commission bias – the suspicion that some advisers may be more influenced by the financial rewards they might earn than in what is truly in the interests of their clients. It gets away from the idea that advice can be ‘free’ – in practice the true cost of advice has often been hidden in the complex charging structures of financial products. This method of remuneration has tended to create a great deal of ‘cross-subsidy’ between clients.

The challenge is that the costs of giving financial advice are high because of the complexity of the subject and the onerous regulatory framework. Against that background we have to look for ways of delivering advice at a cost that offers value to the client whilst covering our costs and giving us some profit! Clients will be charged fees which will reflect the work and expertise involved and the value to the client. Some will be transactional fees. Others will be retainers in the context of an ongoing advisory relationship. Charging directly for the work we undertake will enable us to offer a high level of continuing service to clients. In some cases, it has to be accepted that advice may be unaffordable or the cost disproportionate to the value to the client. In those cases, we will be developing ways for clients to give information to enable clients to ‘self-help’.

Rather than face up to these challenges, some organisations are pulling out of the advisory market. Barclays announced in February 20111 that it was shutting down is financial planning arm. Co-operative Bank had already sold its Independent Financial Adviser business in September 2010.

We previously featured a report by Which? highlighting the poor standards of advice offered by the high street banks and building societies.

At SWLaw, the changes introduced by RDR are seen as an opportunity to grow business and to continue to build longer term financial planning relationships with our clients. No longer will there be the myth that advice can be sought at no cost. No longer will there be any thoughts of commission incentives that might be seen as tainting the appropriateness and independence of the advice. No longer will commission-driven salesmen discredit the advisory industry. We believe that this another important step to a better relationship between adviser and client with a greater degree of openness and trust.