The Retail Development review (RDR) is a process set up three years ago by the Financial Services Authority to make the word ‘independent’ mean just that, by ending the payment of commission from providers to advisors. At the time, over 80 per cent of advisors’ payments were coming from commission, resulting in repeated episodes of mis-selling.
The FSA says that in future independent advisors, or IFAs, will have to consider all relevant options and do so free of any restrictions (such as working with only a select group of providers) or bias, such as being paid by commission. Advisors will also have to sign up to a new code of ethics and agree in advance with customers how much they will pay.
Some in the industry have warned that the end of commission means the cost of IFAs’ services are bound to soar as the full cost falls on to the consumer.
But as the FSA points out, advice from IFAs has never been free. Until now, consumers have had a choice of paying an upfront fee or allowing the cost to be hidden within charges for the products. “The difference now is that this cost will be made crystal clear,” says FSA spokeswoman Sarah Bailey.
The new rules will not force advisors to offer the full range of products. “Some advisers will still offer a restricted range, for instance concentrating on one area of the market such as pensions, or on a selected number of companies, such as advisers tied to banks or building societies,” says Sarah.
“Again, the difference is that they will have to spell this out to their customers, both when talking to them and in a document that will be similar to the Key Facts document that comes with mortgages.”
These changes are due to come into effect on 31 December 2012, though some in the industry are battling with the FSA to have the deadline postponed.
One of the main objections is that all advisors are being required to gain a new Level 4 qualification, which could cost up to £7,000 to obtain. Instead of taking this on board, some smaller companies are expected to give up. A recent survey by research company Oxera found that almost half the smallest firms said they were likely to close or sell up.
This prospective exodus could have implications for consumers. Adam Price, founder of a new comparison website, VouchedFor.co.uk, warns that some less scrupulous advisors planning to exit the market within 18 months could cause a mis-selling spree as they ‘churn’ products which earn them the maximum commission, whether or not they are right for the client.
He says: “Consumers should protect themselves by seeking an IFA that holds a qualification on the FSA’s Level 4 list and is willing to be paid a fee rather than earning commission.”
Finding a reliable IFA has of course been a continuing quest for many of us, with most relying on word of mouth. Vouchedfor.co.uk takes this one stage further, by inviting the best ‘RDR-ready’ advisors to sign up on the site, and then inviting clients to give their feedback and recommendations on their services.
“Clients have always sought IFAs through personal recommendations, but today people expect to find those recommendations aggregated online,” says Adam. “You have only to look at the impact that companies such as Amazon, TripAdvisor and TopTable have had on their respective industries to see this.”
Other ways to find IFAs are through Which Advisor, which has its own customer charter and checks its register every month to ensure all advisors are registered with the FSA, and Unbiased, which recommends local advisers and allows the client to specify whether the service should be fee- or commission-based, which qualifications the advisor should hold, and whether the company can offer a female advisor.
For more information visit the Association of Independent Financial Advisers’ consumer pages, and the Financial Services Authority’s pages on the RDR.