Our five IFA of the Year contestants, almost halfway through the 10-month competition, face the challenge of a stock market shake up, writes Jeff Salway
ONE of the aims of the IFA of the Year competition is to promote the value of financial advice. That’s also among the objectives of radical reforms that came into force last week that could, conversely, reduce the number of IFAs in the UK.
Their population could fall from around 37,000 to just 20,000 within a year or two, as some estimates have it, all because of the retail distribution review (RDR).
This package of reforms, which took effect on 1 January, features a ban on commission payments on product sales and greater qualification demands, in a bid to tackle commission bias and mis-selling.
Advisers now have to agree an upfront fee with their clients; the response to that change will tell us a lot about how financial advice is perceived and valued. Research suggests people remain averse to paying fees. Almost half of those who have sought the assistance of a financial adviser say they weren’t aware that they were paying for it, according to research by the Financial Services Authority, the regulator behind the RDR. A third of people who don’t currently receive advice assume it would be free, it also found.
The problem is that the commission system gave the false impression that advice was free. It wasn’t – the commission meant advisers didn’t have to charge clients a fee, but the charges came out of the investment, with a potentially huge long-term impact on returns.
So, on one hand, there’s a reluctance to pay an upfront fee putting some people off taking advice. On the other hand, many advisers are moving upmarket and a good number are leaving the industry altogether, rather than shoulder the cost and burden of the new demands.
Is this decline in access to advice a reasonable price to pay for an improvement in its quality and in the perception of it? Our IFAs may say it is. This competition has boasted some very well-respected winners down the years, all highly qualified, experienced advisers who have demonstrated to their clients exactly how valuable financial advice can be.
Unfortunately, some so-called “advice orphans”, whose IFA has either left the industry or ditched them in their move upmarket, will find out the hard way just how valuable good advice can be. That’s because many will decide to go it alone, managing their long-term investments for themselves, with the help of execution-only brokers and fund supermarkets.
It might seem easy for a while, but what happens if we get a repeat of the kind of volatility that we saw in late 2008, as the financial crisis unfolded? That’s when good advisers earn their corn. In the long-term, the RDR would ideally result in more people being prepared to pay upfront for the services of an experienced, well-qualified adviser. In some cases, however, it’ll be too late.