From 2012 no independent financial advisers will receive a commission from products they sell. Is this good or bad news?

It’s not the first time the system of financial advice has been tinkered with – so perhaps it’s not surprising that many people are already completely baffled by the different types of financial adviser and how they’re paid. But the change that the Financial Services Authority plans to be introduced by the end of 2012 is a significant one and while it’s good news for you if you can afford to pay for financial advice, it’s likely to mean that some people who don’t need much financial advice will find it harder to get truly independent advice. So what could it mean for you?

The existing financial advice system
Under the current system, there are three different types of financial adviser:

• Tied agent: who can only sell the products of one company

• Multi-tied agent: who can sell products of several companies with which he or she has a ‘tie’.

SAVVY TIP: Both tied and multi tied advisers are normally paid a mixture of commission (or performance related bonus) and salary, which means they’re under pressure to recommend products.

• Independent financial adviser: who can sell the products of any company in the market or – if they’re paid a fee – no product at all.

SAVVY TIP: An independent financial adviser must let you pay for the advice they give you by fee or commission (the choice is yours as to how you prefer to pay). There’s more information about the different types of financial advisers in the article ‘a beginner’s guide to the different types of financial adviser’ elsewhere in this section.

What’s the problem with the current system?
If you go to see an independent financial adviser, you should be given a choice about whether you want to pay a commission or a fee, but critics say that some independent financial advisers are steering people towards paying by commission.

What could change
As part of what the FSA is calling the ‘Retail Distribution Review’ (RDR), all independent financial advisers will have to charge a fee for their work as they will no longer be able to receive a commission from the company whose products they recommend. This means:

• Instead of receiving, for example, 3% commission for recommending a stocks and shares ISA an independent financial adviser would have to tell you how much that advice would cost as a fee.

• You wouldn’t necessarily have to pay the fee upfront for the advice, but what would change is that the IFA would not receive any reward in the form of commission from the firm whose products she or he recommended.

• Instead the IFA would agree the fee with the client. So, for example, if you agreed to pay £500 for advice about a pension, the money could either be paid upfront or be taken from money you're paying into your pension.

SAVVY TIP: This may sound very similar to the existing system where financial advisers can offset the fees they charge by commission (there’s more about this in the article how financial advisers can be paid, elsewhere in this section. However, according to Yvonne Goodwin, independent financial adviser with Yvonne Goodwin Wealth Management, there's one important difference. “Under the current system it’s the insurance company or investment firm that decides how much commission is paid, whereas under the new system the client and adviser can decide how much should be deducted from the premiums or money you pay in.”

Will these changes help?
It depends on who you talk to. Some people passionately believe that banning commission will help consumers, others believe consumers will lose out.

Pros:

• The way you pay for advice will be clearer. According to IFA Louise Oliver of Taylor Oliver believes the change is good news. “What this will bring is simplicity and clarity. Your adviser will have to tell you how much the advice will cost and you’ll have the certainty of knowing there’s no other motive for recommending a particular course of action.”

SAVVY TIP: Although, under the current rules financial advisers have to give consumers a key facts document, which sets out how much they charge and how they’re paid, what consumers aren’t always told is how much less their investment could grow by because they’ve chosen to pay by commission.

• Your adviser won’t have to sell you anything to make a living. They also won't have to recommend products that pay a commission when something else would be more appropriate.

SAVVY TIP: There are some products, such as National Savings & Investments, don’t pay advisers a commission, so if you go to see an IFA and pay by commission, she or he may not recommend them because it would effectively mean working for free.

Cons:

• Some people will lose out. People who don’t need much financial advice or who don’t have much money will lose out, according to Ruth Whitehead of IFAs Ruth Whitehead Associates believes the changes will mean many people won’t have access to independent financial advice. “Those who are worried that they won’t be able to afford an independent financial adviser won’t go and see one.”

SAVVY TIP: Currently many IFAs say that only wealthier clients always prefer to pay a fee and many others are happy with a commission.

• There may be room for confusion. Not all products are covered by the new rules – for example advisers recommending so-called ‘protection products’, such as life insurance, critical illness insurance and income protection, can still be paid commission.

SAVVY HELP: Karen Ritchie is one of SavvyWoman’s panel of experts. Why not ask Karen a question about financial advisers by clicking here?