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FSA ban on commission-based selling sparks 'death of salesman' fears FSA ban on commission-based selling sparks 'death of salesman' fears
(about 17 hours later)
New rules that ban commission-based selling are due to come into force on New Year's Eve in the biggest shake-up of the investment industry for decades, dubbed by some "the death of the salesman".New rules that ban commission-based selling are due to come into force on New Year's Eve in the biggest shake-up of the investment industry for decades, dubbed by some "the death of the salesman".
From now on, financial advisers will have to charge upfront fees to their customers rather than receiving commission from companies supplying financial products. The move by the FSA under its retail distribution review (RDR) includes pensions, Isas and unit trusts, and is designed to be more transparent and to reduce the risk of mis-selling. From now on, financial advisers will have to charge upfront fees to their customers rather than receive commission from companies supplying financial products. The move by the Financial Services Authority under its retail distribution review (RDR) includes pensions, Isas and unit trusts, and is designed to be more transparent and to reduce the risk of mis-selling.
It means that consumers will see clearly the cost of financial advice which may previously have appeared to be free since the charges were part of the commission payments made to the adviser. But some analysts believe that spelling out the costs, even though these can be spread over a number of years, could put many customers off seeking advice.It means that consumers will see clearly the cost of financial advice which may previously have appeared to be free since the charges were part of the commission payments made to the adviser. But some analysts believe that spelling out the costs, even though these can be spread over a number of years, could put many customers off seeking advice.
A recent survey by Rostrum Research found that nine out of 10 consumers would only pay up to £25 for an hour's financial advice, compared with the mooted £50-£250 an hour fee range expected in the review.A recent survey by Rostrum Research found that nine out of 10 consumers would only pay up to £25 for an hour's financial advice, compared with the mooted £50-£250 an hour fee range expected in the review.
Graeme Bold, director of UK Retail RDR at Standard Life, says: "The requirement to disclose adviser charges in cash terms puts a definite price tag on financial advice. Asking someone to pay what might be a few thousand pounds a year is, psychologically at least, quite different to quoting a 1% ongoing charge." Graeme Bold, director of UK Retail RDR at Standard Life, said: "The requirement to disclose adviser charges in cash terms puts a definite price tag on financial advice. Asking someone to pay what might be a few thousand pounds a year is, psychologically at least, quite different to quoting a 1% ongoing charge."
Advisers will also have to pass tough new exams if they want to continue managing the financial affairs of their clients.Advisers will also have to pass tough new exams if they want to continue managing the financial affairs of their clients.
According to management consultancy Deloitte, as many as 5.5 million people will either choose to cease using financial advisers or no longer have access to them. Before the changes, most of the big banks (including Barclays) have already pulled out of offering mass-market retail advice or have begun culling the number of advisers they have. In June, Royal Bank of Scotland blamed the new regulatory rules for its decision to axe 618 adviser jobs, while in November, Lloyds stopped face-to-face advice for anyone with less than £100,000 in assets after it found that most consumers were unwilling to pay a fee for the service. HSBC is in the process of cutting up to 700 roles, again blaming the introduction of RDR. According to management consultancy Deloitte, 5.5 million people will either choose to cease using financial advisers or no longer have access to them.
The full impact on Britain's 21,700 independent financial advisers will not be known until the new year, but the indications are that some will quit the industry, retire, or switch to a new "restricted adviser" model. Most of the big banks have already pulled out of offering mass-market retail advice or have begun cutting the number of advisers they have. In June, Royal Bank of Scotland blamed the new rules for its decision to cut 618 adviser jobs, while in November, Lloyds stopped face-to-face advice for anyone with less than £100,000 in assets after it found that most consumers were unwilling to pay a fee for the service. HSBC is cutting up to 700 roles, again blaming the introduction of RDR.
But a spokesman for the Association of British Insurers said that doom-laden stories in the industry's trade press are likely to be wide of the mark. "We don't think the numbers of IFAs will be decimated, as some are saying," said the ABI's Malcolm Tarling. The full impact on Britain's 21,700 independent financial advisers will not be known until the new year, but the indications are that some will quit the industry, retire or switch to a new "restricted adviser" model.
Figures from the FSA suggest that most advisers have buckled down to the new professional standards regime. "The latest statistics we have are that 94% of advisers expect to be qualified come 31 December. 86% already hold the correct qualifications and a further 10% are awaiting results for their final exam," said an FSA spokeswoman. A spokesman for the Association of British Insurers said that doom-laden stories in the industry's trade press are likely to be wide of the mark. "We don't think the numbers of IFAs will be decimated, as some are saying," said the ABI's Malcolm Tarling.
Figures from the FSA suggest that most advisers have buckled down to the new professional standards regime. "The latest statistics we have are that 94% of advisers expect to be qualified come 31 December – 86% already hold the correct qualifications and a further 10% are awaiting results for their final exam," said an FSA spokeswoman.
The FSA anticipated that only one in 12 advisers would opt for the new restricted status, in which they give advice on only a limited range of products and services. But in recent weeks, more and more firms have declared that they will be restricted, as the costs and complexities of remaining a full IFA are too onerous.The FSA anticipated that only one in 12 advisers would opt for the new restricted status, in which they give advice on only a limited range of products and services. But in recent weeks, more and more firms have declared that they will be restricted, as the costs and complexities of remaining a full IFA are too onerous.
Many advisers are terrified they may lose their main stream of income – called "trail commission" – from past sales. Until now, anyone selling an investment fund has tended to earn commission worth 0.5% of the fund value, every year. The new rules ban trail commission from New Year's Eve, but allow advisers to continue to benefit from trail on past sales, estimated at around £1.5bn a year in total. Many in the industry expect advisers will stop contacting former clients, for fear of disturbing the lucrative commission rates they are receiving.Many advisers are terrified they may lose their main stream of income – called "trail commission" – from past sales. Until now, anyone selling an investment fund has tended to earn commission worth 0.5% of the fund value, every year. The new rules ban trail commission from New Year's Eve, but allow advisers to continue to benefit from trail on past sales, estimated at around £1.5bn a year in total. Many in the industry expect advisers will stop contacting former clients, for fear of disturbing the lucrative commission rates they are receiving.
There is also concern that commission-chasing salespeople will switch to pushing life, critical illness and private medical insurance policies, which do not come under the FSA commission ban.There is also concern that commission-chasing salespeople will switch to pushing life, critical illness and private medical insurance policies, which do not come under the FSA commission ban.
The only large, stock market quoted financial adviser, Hargreaves Lansdown, has already been hit by fears about the impact of RDR on its business. In late October, Citigroup downgraded the company from "neutral" to "sell" as it cut its earnings forecast. Citigroup says that a decision by Hargreaves to pay loyalty bonuses in an effort to keep clients is likely to knock £10m off 2013 profits. Hargreaves turned from a medium-sized IFA into a national brokerage with a market cap of more than £3bn by pioneering discount deals in investments and pensions. But a plethora of challengers are now predicting that the RDR rules will allow new operators to become "tomorrow's Hargreaves".The only large, stock market quoted financial adviser, Hargreaves Lansdown, has already been hit by fears about the impact of RDR on its business. In late October, Citigroup downgraded the company from "neutral" to "sell" as it cut its earnings forecast. Citigroup says that a decision by Hargreaves to pay loyalty bonuses in an effort to keep clients is likely to knock £10m off 2013 profits. Hargreaves turned from a medium-sized IFA into a national brokerage with a market cap of more than £3bn by pioneering discount deals in investments and pensions. But a plethora of challengers are now predicting that the RDR rules will allow new operators to become "tomorrow's Hargreaves".
Bestinvest, in a report entitled "The death of the salesman and the rise of the DIY investor" predicts that millions of individuals, unable or unwilling to afford fees for advice, will go it alone and use internet-based "execution only" services rather than financial advisers. Bestinvest, in a report entitled The death of the salesman and the rise of the DIY investor, predicts that millions of people, unable or unwilling to afford fees for advice, will go it alone and use internet-based "execution only" services rather than financial advisers.
The past few months has seen the launch of several web-only services aimed at the new breed of DIY investors, such as Nutmeg and Rplan, while existing advisers such as Bestinvest, Informed Choice and Plan Money have unveiled execution-only services. Instead of charging a fee equal to 0.5% of any fund bought, they are pricing their services as low as 0.05%. "We are where Hargreaves were 10 years ago," says Ian Williams, managing director of Cavendish Online, which claims it will be the cheapest seller of funds in the post-RDR world. The past few months has seen the launch of several web-only services aimed at the new breed of DIY investors, such as Nutmeg and Rplan, while existing advisers such as Bestinvest, Informed Choice and Plan Money have unveiled execution-only services. Instead of charging a fee equal to 0.5% of any fund bought, they are pricing their services as low as 0.05%. "We are where Hargreaves were 10 years ago," said Ian Williams, managing director of Cavendish Online, which claims it will be the cheapest seller of funds in the post-RDR world.
The major asset management groups are confident they will retain the 0.75% fee they earn from the traditional 1.5% annual management charge. Life companies, past masters at packaging financial products such as endowment mortgages with huge commissions to advisers, are expected to be worse hit, although they may offset the business loss from advisers with a revival of direct business.The major asset management groups are confident they will retain the 0.75% fee they earn from the traditional 1.5% annual management charge. Life companies, past masters at packaging financial products such as endowment mortgages with huge commissions to advisers, are expected to be worse hit, although they may offset the business loss from advisers with a revival of direct business.
What to ask your financial adviser
Here are five questions the Financial Services Authority recommends that customers ask their adviser in the light of new rules:
1 How much will your advice cost me and how is this calculated?
2 Can you explain the different ways I can pay for advice?
3 Can you explain what products you can advise me on and any areas you cannot help me with?
4 How often will you review my investments?
5 Can you show me proof that you are qualified to give advice?
Vicky Shaw, PA