Like all government agencies, the Financial Services Authority (FSA) ostensibly exists to help protect consumers and ensure they get fair treatment. Unfortunately, sometimes the best intentions from regulators have unintended consequences that are actually harmful. Such is the case with the recently enacted Retail Distribution Review (RDR).
The RDR was designed to level the playing field between investors and the companies they work with by forcing, among other things, a more equitable fee structure. However, as the Telegraph and other media outlets warned last year, the regulatory changes have now priced middle-class investors out of the market and left them to fend for themselves.
The Heart of the Matter
The RDR is more than just a few changes in the way financial advisers can charge fees. However, for the purposes of this article that is where we'll focus. The changes have forced investment companies, banks, and independent advisers to drop the old commission-based fee structure in favour of an upfront flat rate.
When you see a financial adviser today, you will be charged an hourly rate or a standard consultation fee. You will pay for your advice even if you decide not to invest your money with that company. According to FSA regulators, there are several reasons for getting rid of commission-based fees:
- Transparency - It is believed that when financial advisers earn their living on commissions, the consumer has no real, clear-cut way of knowing how much he or she is being charged. The new system makes that clear up front by presenting a bill-for-service scenario.
- Unbiased Opinions - By forcing financial advisers to work for a set fee, they are supposedly more likely to give unbiased opinions about the products they sell. As the thinking goes, because they earn no commission from those products, they are less likely to favour one over another.
- Money Management - From the perspective of the investor, the new set rate model will supposedly help them to be better money managers. Where the prior model never allowed them to budget the cost for seeking financial advice, the new model will. Those who cannot afford it will not be spending money they do not have.
On the surface, all of these things might sound like noble intentions; maybe they are. But whenever government regulates the free market it always has unintended consequences. The very thing the Telegraph predicted last autumn has already begun to come to fruition.
Middle-Class Investors Priced Out
In late January (2013), the Independent published a report regarding the immediate effects of the RDR on middle-class investors in Britain. Just a month into the new regulations and it is already apparent that being able to afford the advice of a professional financial adviser is significantly more challenging for the middle-class. According to the paper, the problem is two-fold.
First of all, investors with long-term needs are seeing rates for advice starting around £160 per hour and going up from there. That's a pretty steep price for getting advice on ISAs, bonds, and equities. Even more so if an investor decides he or she does not like the products being offered by their adviser's company.
Secondly, and perhaps more importantly, investors with a low net worth or one-off needs are being turned away because the adviser will not be able to put in enough time to make it worth his or her while. The investors are left to fend for themselves even if their knowledge of finance and investing is limited.
New Requirements for Advisers
In addition to changes in the way advisers charge for their services, the RDR also put new licensing regulations in place for those wishing to become advisers. The new licensing requirements further restrict how advisers can conduct business as well as how they are classified. There are now two classifications known as:
- Independent Advisers - For a finance adviser to classify him or herself as independent they must offer consumers information about every investment option available to them, regardless of whether or not the company they are affiliated with sells all of those products. This ruins the incentive for financial services companies to employ independent advisers because they are helping the competition.
- Restricted Advisers - The restricted adviser functions the same way most advisers did under the old model. They represent a specific company and will recommend the products that company sells. It is assumed that most restricted advisers will become salaried employees rather than working as self-employed individuals.
The changes in classifications mean a change in qualifications as well. For someone to be classified as an independent adviser he or she must have additional qualifications that hold them to a higher standard than the restricted adviser. To demonstrate that they meet those higher standards, the adviser will have to obtain accreditation from an appropriate agency. That could possibly cause hourly fees to go up as well.
Why You Need a Financial adviser
The fact that the regulatory changes seem to be pricing middle-class investors out of the market is no light matter. By making it more difficult for investors to get the advice they need, the FSA is also making it more difficult to invest. And in a day and age when we are trying to encourage people to save and invest, this seems rather counterproductive.
For the average investor, the land of financial opportunities seems more like a confusing maze than a fertile farmland waiting to be cultivated. Plenty of Brits do not understand the terminology, do not realise the potential risks involved in investing, and do not know how to find that proper balance between risk and return. Expecting them to navigate on their own might be expecting too much.
As an example, consider the 55-year-old man who suddenly realises he will need to supplement his pension if he wants to live a comfortable lifestyle once he retires. Being so late entering the game he needs investment vehicles offering a fairly high yield. Without proper advice, he could take on investments that are too risky; investments that could potentially leave him worse off than when he started.
On the other side of the spectrum, consider the 25-year-old university graduate just getting started in life. He may want to begin investing in small amounts so that he can build his portfolio over time. Yet his limited budget will not allow him to pay for a financial adviser. What does he do? He puts it off until he can afford it. Continued procrastination suggests that day may never come.
Seeking Advice Elsewhere
It has been suggested by some that there are other ways to get good financial advice, at least in the short term. For example, the new rules allow some organizations to continue to dispense advice for immediate situations; things like transferring funds from one ISA to the next without meeting all the qualifications of the RDR. However, the ambiguity here is such that this type of advice might be hard to find.
Another avenue may be an investment vehicle rating system the FSA promises is forthcoming. These ratings will rank various types of investments and specific products on a sliding scale based on risk. At the very least, that should help investors find options that meet their comfort level.
Then there's always the advice you can glean from family members and friends who have a successful track record of investing. However, this type of advice should always be taken with a grain of salt. You obviously have no recourse should the advice you seek in this way turnout to be faulty.
Internet a Virtual Library
The Telegraph article from last autumn pointed out that a J.P. Morgan Asset Management survey showed only 13% of Britain's middle-class investors would be willing to pay for financial advice under the new rules. At the same time, those willing to tackle investing on their own have a virtual library of information available through the Internet.
There are countless websites available where investors can learn the terminology, discover how certain types of products work, and track how various investments perform over the long haul. Doing your own research online may not be as easy or pleasant as visiting a financial adviser but, with a little work, it is possible to self-direct your investments.
In the meantime, investors of high net worth still have plenty of advisers available through high street banks, investment houses, and independent financial services companies. They just need to plan on some pretty steep fees to be charged up front. Those fees might even be a better deal than paying commissions -- if an investor has enough money in the game.
Only time will tell whether the new RDR regulations will help or hurt long-term investing. If the first month of the new rules is any indication, things are not looking good for middle-class investors in the UK. Hopefully the FSA will be willing to revisit the regulations if things do not go as they anticipated.
If you are planning to invest this year, and you can afford it, employing the services of a financial adviser is always a good idea. We all need help. If you cannot afford it, make sure you do as much research as is necessary to guard against poor decisions. And above all, be cautious.
If you need help finding a regulated financial adviser then there are plenty from which to choose. Some of them work independently while others work for banks or financial services companies. We have included the following links to get you started in your search for an adviser:
FinancialAdvice.co.uk - A website made available through Shepherds Friendly Society, Inc. This online financial advice service offers free answers to basic questions in 60 minutes or less. More thorough advice will incur a fee.
Unbiased.co.uk - Rather than providing financial advice directly, this website helps you search for a qualified adviser based on your specific needs. Answer a few questions and let the website match you with the appropriate adviser.
Hargreaves Lansdown - A financial investment firm regulated by the FSA. They offer unbiased advice as well as DIY solutions for investors who just want a little help learning how to be self-directed. You can contact them online or call a telephone number provided on the site.
Lighthouse Financial Advice - This link takes you to the site of a regulated financial advice company. They offer advice on all sorts of investments for different types of investors. They can help you with your retirement, your insurance choices, and more.
Free Index - A website that acts as a nationwide directory of UK financial advisers. The site allows you to find the names and locations of advisers, along with ratings based on customer reviews.
Financial-adviser.co.uk - This is another directory site that helps you to find a financial adviser in your area by simply entering your postcode. They include a limited amount of information about different types of investment products.
Simpson Millar Solicitors - An established firm with 11 offices in the UK. Among their many services, they offer unbiased financial advice covering a wide range of topics including pension funding and financial planning for the elderly.
The Internet is a great place to find all sorts of information for self-directed investors. You can find guides for new investors, recommendations for seasoned investors, and everything in between. Here are links to a couple of sites you should find helpful. Just be sure to do plenty of research before you invest.
Money Supermarket - This comparison website puts you in touch with a single, regulated financial adviser who will contact you to discuss your needs. Simply fill out the online form and submit it at your convenience.
Money.co.uk - Offers dozens of online guides targeting specific investment products. On this site, you can learn about things like ISAs, investment trusts, spread betting, unit trusts, and Forex trading.
Money Advice Service - A government-sponsored service offering financial advice and investment information online. The information and service are both free to consumers, paid for by levies placed on the financial services industry.
Telegraph Money - The Telegraph has assembled a large collection of advice from well-established UK financial advisers. They aim to help their readers get as much online advice as they need. So far, they are off to a good start.
Findanadvisor.org - This site is a combination adviser directory and financial advice library. They offer a number of helpful guides as well as a tool to find a financial adviser in your area.