The impact of the RDR on the cost of advice and clients’ willingness to pay for advice is a key issue for any adviser business in the run up to January 1, 2013.
For businesses that have not previously used fees in a significant way, this means determining whether to charge per hour, per annum or for each piece of advice and what level to set the fees at. For other businesses, this will mean finetuning their fee offering or expanding it to cover all their pension and investment business and determining if their full client bank can tolerate fees at a level that makes financial sense for the IFA.
These changes are giving IFAs enough to deal with without the FSA stepping in with its size 12s to further stir up the issue with inaccurate and misleading claims.
In an update on the RDR on its website last week, the FSA outlined what the RDR will mean for consumers and how this will affect the provision of investment advice. Alongside explanations of the requirement for higher qualifications and the need for independent advice to be free from any distorting influence, such as commission and restricted product panels, the FSA has also addressed the subject of customer-agreed remuneration and this is where it runs into trouble.
Its explanation of CAR is fine but it says clearly: “These changes are not altering how much the advice should cost.”
The adviser-charging round table recently held by Money Marketing concluded that, for many clients, this is simply not true.
If fees are paid out of net income, rather than out of a tax-efficient product, there is a greater cost to the client. If advisers offer advice as a stand alone service, HMRC rules mean this will be subject to VAT, meaning an automatic 20 per cent increase in the cost of advice for the client.
Although some high-net-worth clients may see a reduction in the cost of their advice by moving from commission to an hourly or annual fee, when you add in additional business costs, such as attaining a higher standard of qualification and increased capital adequacy (both direct consequences of the RDR) the cost of advice is certain to increase for a majority of clients.
The FSA is not only forcing up the cost of advice but by disingenuously claiming this is nothing to do with the RDR, it leaves IFAs open to charges of greed and profiteering when they tell their clients that costs are going up.