FSA Changes from 1 January 2013 – fees only for Independent Advisers?
The FSA rules have changed for financial advisers such that any financial adviser who wishes to call themselves independent, from the 1st January 2013, must only charge fees – not commission.
The FSA have brought in these new rules as the latest step, in many over the past three decades, brought in with the purpose of incrementally raising the standards of financial advice. In addition to prohibiting commission, all independent advisers will now have to have a degree level financial advice qualification.
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Solicitors up to now have been required to refer to independent advisers but currently there is disagreement between the SRA and the Law Society as to whether this should continue to be the case. The SRA is relaxing the rule in effect by saying firms must act in the best interests of the client which may not prevent referral to a tied agent in a particular case; whilst the Law Society are recommending solicitors continue to use only independent advisers. Therefore it is important that we understand the practical effect of these changes. In other words what does “fee-only” advice really mean – and how will these new rules work to the client’s advantage?
Fee-only advice does not mean that an adviser must always invoice their client. The new rules continue to allow a fee to be taken as a percentage of the initial investment, and for an ongoing fee to be taken as a yearly or regular percentage charge: for example a 3% initial fee, plus 0.5% annual ongoing fee.
To many this will look much like commission under another guise. The important difference is that these charges must come straight from the investment, as agreed by the client, and not hidden in forward annual charges. In other words, a £100 investment with a 3% initial fee would immediately and transparently become £97. It is no longer possible for providers to hide an initial charge in higher future annual charges, which come with an exit penalty on early encashment.
Furthermore, the client always has the option to insist that an invoice is levied on an hourly rate rather than the fee being taken as a percentage from the investment. Using our example therefore, if an invoice were to be presented for £3, the £100 would be invested as a £100 with no percentage charge deducted.
The important point is that the option of what many would regard as commission does remain, although in a much more transparent form – and an option for this to be invoiced instead must be given.
Ongoing Advice Fees
Importantly, the new rules require that annual ongoing fees, which can also be taken as an agreed percentage, must be in return for ongoing advice and oversight by that IFA. They cannot be sold on to other advisers, nor continue to be taken when no advice is being provided.
Previously any ongoing commission, also called trail commission, was paid with no duty or obligation to provide advice. Therefore, clients paying such commission could be sold on to other advisers, who would never be required to contact the clients, but who would continue to take these ongoing commissions with impunity.
This has now changed and any change to an existing product, or new product, will require the IFA to agree again with the client their ongoing fee, taken as an ongoing percentage.
It is very likely that this change will force a much better practice within the industry: namely, of continuing to monitor and serve clients for the long term, not simply sell a high commission generating product, as many banks do, and then never be heard from again.
Higher Adviser Qualification Levels
Independent advisers are now also required to hold degree level qualifications.
In 2005 the very few financial advisers in the UK with degree level financial qualifications were granted Chartered status. I was at the Guildhall in the city of London at the first induction of those 300 Chartered financial planners in 2005.
This was a landmark for financial advice and represented the realisation that independent financial advice of the future had to be based on advice – not selling products.
These new FSA rules for 2013 have formalised the requirement to hold this level of qualification in order to be termed an independent financial adviser. This is therefore another landmark in the evolution of financial advice, away from financial sales.
What will this mean for clients from 1 January 2013?
Firstly, every independent adviser will have to address these issues of fees, hourly rates, and ongoing fees at the initial meeting. This will force those advisers capable of doing so to demonstrate the value that they will add, both initially and in the years ahead. It will also act as a force to drive down initial charges because large initial commissions will be transparently excessive.
These new rules will also have the effect of pushing independent advisers towards the more complex and weathly clients where the value of advice is most marked. This is because a transparent fee will have the greatest value, as in legal advice, to those clients for whom the most relative value is at stake. By contrast, the more mass-market client scenarios may become uneconomical for many independent advisers to cater for.
I believe it will also force independent advisers, now required to charge a fee into greater union with solicitors. This is because of the more similar approach that is now being adopted, and because solicitors are also experiencing pressures to move to the more value added, less commoditised, areas of practice. There are therefore clear synergies for solicitors and independent advisers to work closer together, reinforced by the advent of alternative business structures in legal practice.
Anyone wishing to discuss the detail of the new rules applicable to independent advisers and their application to their circumstances is welcome to contact me via the details below.
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