How changes to independent financial advice affect you
Over the past few years the Financial Services Authority (FSA), the UK's financial services industry regulator, has been looking at the investment market.
This means investigating the services of banks, life insurers, financial advisers, building societies and fund managers.
It has been looking at how they give advice on financial products, for example a pension or an investment fund, and sell financial policies.
This is called the RDR, or retail distribution review, and is part of the FSA's plan to help protect consumers when it comes to the financial advice they receive.
The FSA wants to make the process clearer to make sure you understand and receive the right advice according to your personal financial situation.
A number of factors led to the introduction of the RDR.
These included worries about the selling of commission-based products and a lack of understanding by people about financial services and financial decision making.
Many of us trust that we will be given the right advice according to our needs and attitude to risk, but sometimes this is not always the case.
The FSA has come up with the following new rules that the industry must abide by and put in place by the end of 2012:
- advisory firms to explicitly disclose and separately charge clients for their services
- advisory firms to clearly describe their services as either independent or restricted
- and individual advisers to adhere to consistent professional standards, including a code of ethics.
But what does this really mean for you?
Independent or restricted?
Currently, if you are looking for financial advice, you have three options to choose from.
You can go to an independent financial advisers (IFAs), a multi-tied adviser or a tied adviser.
An IFA is the only type of adviser that can select from all the products available in the marketplace, offering truly unbiased financial advice.
Tied advisers can only advise on the products of one provider.
Multi-tied advisers are financial advisers that can recommend the products of a limited selection of providers.
From 2013 advisers will need to clearly list what type of advice they can provide.
Tied and multi-tied advice will be classed as "restricted".
Remuneration and charges
IFAs currently offer the choice of paying by fee or by commission.
A fee will either be charged at an hourly rate or through a total amount for the whole advice process.
Paying indirectly through commission means an amount will be deducted by the product provider from the products you may take out.
From January 2013, IFAs will not be able to take commission as a form of remuneration but instead will have to quote a fee for the advice given to you.
In some instances this can be paid from investments, if you would prefer.
Independent financial advisers will need to hold at least QCF level 4 qualifications (equivalent to the first year of a degree course) if they wish to continue offering financial advice beyond 1 January 2013.
The FSA's aim is to provide consumers with a clearer system of getting financial advice.
By raising qualification levels, and increasing the transparency between adviser and client, it hopes to improve the standard and reputation of the industry, and in turn build greater trust in financial services companies.
Given the current economic climate, independent financial advice has never been more important.
Selecting the right mortgage, pension and investments are just a few of the pressures and considerations people are faced with.
Seeking independent advice
It is a good idea to contact at least three independent financial advisers before selecting one and to find out as much information as you can.
Here is a quick checklist to help you get the best advice according to your personal financial situation.
Ask what qualifications they hold.
If you are looking for advice on a particular subject making sure your IFA holds qualifications relevant to that area.
It is also a good idea to ask whether the IFA intends to stay independent after 2012, following the RDR.
Make sure the adviser knows your attitude to risk and takes a record of your financial background and what you want from life.
Some IFAs focus on particular product areas so choose an adviser that deals with your specific needs.
The adviser will ask you a lot of questions to ensure the advice provided is suitable for your needs and risk attitude.
So make sure you answer the questions as fully as you can and have the relevant information to hand such as details of existing financial products you may have.
Make sure the adviser explains to you how much the advice will cost you.
Also, make sure you have thought about whether you want to pay for this service by fee or by commission, and ask the IFA what the implications of each choice are.
Ask why any product or company they may recommend is suitable for you.
It is up to you to understand what you are being told.
Never be frightened to ask the IFA to clarify something if you are unsure - they will be more than happy to explain.
The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Links to external sites are for information only and do not constitute endorsement. Always obtain independent, professional advice for your own particular situation.