RADICAL REFORMS to financial advice coming into force in a month’s time are set to leave more people without access to advice and exposed to unsuitable investments.
Thousands of investors in Scotland are expected to cut out the middleman once the retail distribution review (RDR) takes effect on 1 January, taking the DIY route, either through choice or because they have no option.
The centrepiece of the biggest investment industry shake-up in generations is the outlawing of commission payments on product sales. The ban is designed to eliminate advice bias, in an attempt to boost the reputation of an industry tarnished by mis-selling.
Instead, advisers will have to charge upfront so that the investor knows what they’re paying and for what (although it will still be possible to take the fee from the investment, with the customer’s consent).
Advisers will also have to meet higher qualification requirements, if they are to be continue being labelled as independent. Many will adopt the new “restricted” status, a somewhat unhelpful tag for those able to advise on most, but not all, products.
The idea behind the changes – more than six years in the planning – is to raise standards of advice, remove bias and improve transparency. In doing so, trust in financial advice will improve – in theory.
But warnings abound of significant drawbacks. The biggest is likely to be a further widening in the “financial advice gap”, as advisers decide they can no longer justify advising on savings and investments below a certain level and consumers baulk at paying an upfront charge.
Lord Flight claimed this year that people with less than £100,000 in savings and investments would no longer be able to access advice. A similar warning was issued in the House of Lords only this week.
Nearly 1.3 million Scots own financial products that will be affected by RDR and nearly half used an adviser to buy them, according to research by Deloitte. It has predicted that up to 500,000 people in Scotland alone could become advice “orphans” once the new rules are in place. Fears that those “orphans” would turn instead to high street banks, putting them at risk of unsuitable advice or mis-selling, have receded; many of the banks have also decided they’ll only offer investment advice to certain customers.
So, the probable outcome is that more people – both those unable to get advice or unwilling to pay for it – will go their own way and take the DIY approach.
Donald MacKechnie, insurance partner for Deloitte in Scotland, said: “Customers in the advice gap post-RDR with sufficient knowledge of the internet are likely to move online – proactively shopping around.
“Others are likely to need guidance – some form of human contact – before doing the same.”
As it stands, more than four in ten investors north of the Border use an IFA, with 27 per cent getting help from a high street bank or building society and 27 per cent buying direct from investment providers, according to research by Bestinvest.
More than one in three Scots surveyed by Bestinvest said they either definitely or probably would opt against using an adviser if they had to pay an explicit fee. That suggests many who previously used advice on a commission basis wrongly perceived it as meaning they weren’t paying for it; they were, with the remuneration for the adviser coming out of their funds, resulting in diminished returns.
Worryingly, just 8 per cent said they thought they could do a better job than their adviser or broker – yet more people are expected to take the DIY approach from next year.
A third of consumers intend to do their own financial planning in the wake of the RDR, doing their own research so they can avoid paying for advice, said Deloitte. Yet just three in ten people claim they’re sufficiently knowledgeable to pick the right financial products. Experts fear that by taking the DIY approach, more people will buy unsuitable investments, putting themselves at risk of losses.
There are advantages to going it alone, not least reduced costs. There are significant pitfalls too, particularly for those without the knowledge or expertise to take charge of their investments without expert input.
MacKechnie said: “There is a risk that consumers who do their own research may not buy the right products – keeping longer-term savings in cash, or making investments that are too risky, for example.”
Many will feel they have no choice though, especially if they’ve been “orphaned” by their financial adviser. That’s likely to fuel a rise in the number of people using execution-only fund platforms and discount brokers. They’re not allowed to offer advice, as the name suggests, but they can provide information and help you act on your pre-determined choices.
The best known include Hargreaves Lansdown’s Vantage, Interactive Investor, Fidelity FundsNetwork and Bestinvest. The latter has launched a free investment report service, designed to help people manage and analyse their investments. It helps investors measure their risk exposure, asset allocation, performance and charges.
Execution-only services – expected to be offered by a growing number of advice firms and asset managers post-RDR – can be handy for low-cost investing, if you know what you’re doing and you’re happy to take control of your investments. But there’s no substitute for advice or planning that takes the bigger picture into account, including circumstances, objectives, tax status and other financial needs.
Buying investments online or through an execution-only broker is easy enough, but knowing exactly what you need and why is another matter. Charlotte Black, head of corporate affairs at Brewin Dolphin in Edinburgh, said: “The best things in life may be free – but that does not apply and never has to professional advice. The RDR will mean the cost of professional financial advice is transparent – but not necessarily more expensive than it was hitherto.
“All the good reasons for getting qualified professional advice still stand and the dangers of DIY with all your precious savings are equally stark.”