Important changes to the way people receive advice on financial matters such as pensions and investments took effect from 31 December. Known as the Retail Distribution Review, we look at what’s changing.
Guidance from a financial adviser can be invaluable, particularly to people approaching retirement.
But the process can be unclear and the cost of advice confusing, says watchdog the Financial Services Authority (FSA), with many charges hidden away in the form of commission for salesmen.
This is why, at the beginning of 2013, the FSA is making changes to the way people receive and pay for advice.
New set of rules
The changes are taking place as part of a programme called the Retail Distribution Review (RDR).
This is a new set of rules which aim to establish a clearer and more trustworthy financial advice market.
The FSA hopes the changes will mean consumers:
- are clearer about how much advice will cost.
- know what they are paying for.
- benefit from improved professional standards.
One of the main changes under RDR is that advisers will no longer be paid commission.
Instead, they will have to explain to their customers how much advice will cost them.
The adviser will then get paid a set fee, as agreed with the customer: this can either be charged up front, or paid over a certain period.
The FSA says this should make it clearer for people to know exactly the price they are paying for advice.
An advice gap
Some pension experts are concerned this could lead to an "advice gap", where the less well-off shun advice because they have to pay for it upfront.
However, it is worth noting that advice has never been free.
As mentioned, financial advisers have traditionally been paid commission, which is usually taken as a percentage of your investment – typically 1 to 8 per cent of the total invested.
So for an investment of £10,000, an adviser could have received between £100 and £800 commission. In many cases, the customer would not have realised this.
Other changes under RDR mean financial advisers will have to clearly state whether they can offer advice on a range of financial products, or just on specific areas, such as pensions.
Meanwhile, the FSA is also increasing the minimum professional standards of qualification that advisers have to meet to ensure their knowledge is up to date.
The right decisions
Despite the landmark changes, 60 per cent of financial advisers feel the general public is unaware of the RDR, according to financial research company Defaqto.
Defaqto spokesman David Cartwright says: "Advice is critical to help people when looking at long-term and complex financial products, such as pensions and investments, to support them to make the right decisions for their financial futures.”
The changes come at a time when it is more crucial than ever for people approaching retirement to make informed financial decisions.
With annuity rates falling by 14 per cent in the last three years, according to pension specialist MGM Advantage, it is crucial people look to maximise their retirement income.
Andrew Tully, pensions technical director at MGM Advantage, says: "There are many solutions at retirement which could suit people’s needs.
"For those who need or want to buy a lifetime annuity, they should consider the shape of that income, so whether they want income to continue to their family after they die, or whether income should increase each year in payment.
"A financial adviser is well placed to help people with these decisions."
Tully adds that people should shop around for the best annuity rate, making sure health and lifestyle factors are taken into account.
"The difference between the worst standard annuity rate and the best enhanced annuity rate for someone who has a moderate medical condition can be more than 40 per cent, so it is well worth taking a little time to look around the market," he adds.