Independent Financial Advisors; an end to confusing charges?
A recent shake up of the financial world was designed to make the process of engaging and paying IFAs simpler, clearer and more transparent. This followed years of hidden commissions with consumers kept in the dark as to the true cost of advice.
The new rules provide for:
- A total ban on commission payments
- Fees to be agreed with consumers up front
- A broader scope of products on which an advisor must be able to advise on in order to operate as an IFA and the introduction of a new definition of “Restricted Advice”.
- A requirement for IFAs to spell out all charges very clearly – in pounds and pence, rather than as percentages.
The changes were welcomed by many, who felt they have been short-changed for years, particularly when compared with the Investment Fund Markets in countries such as the United States. The US pay half as much as the UK for financial advice.
The financial world is complex to navigate. It’s no wonder that we rely on the expert knowledge of IFA’s. Unfortunately this has left consumers vulnerable.
The aim of the new rules was therefore to promote a more transparency between IFAs and consumers concerning charges. Unfortunately however, some IFAs have been reluctant to move away from “the good old days”.
In a recent report the City Watchdog, the Financial Conduct Authority (FCA), say that whilst most IFAs have made progress, many were still confusing consumers over charging by failing to disclose ongoing costs properly and by sticking doggedly to percentage expressions of fees.
IFAs must now provide consumers with an initial disclosure document outlining their charges and their scope of service. These documents should enable consumers understand what advice is being given and how much it will cost. However, the new rules will only work if they are followed by IFAs - something which they still appear reluctant to do!
A step in the right direction, but we aren’t there yet
Whilst the FCA has made a decent start in getting intermediaries (brokers and IFAs) to come clean about their charges, this still leaves many of the investment fund providers themselves. For example, if you invest in a fund you will now know how much the middleman is paid, as well as a percentage supposedly showing the fund charges. However, these figures aren’t the full story as they don’t show the additional charges for dealing costs, stamp duty, auditing and other fees. So there is still a great lack of clarity concerning the real cost of buying investment products.
For obvious reasons the massive investment fund management industry would like to keep things as they are. When Which? looked at the real costs of investment funds they found the actual costs were sometimes around twice that quoted, after the additional charges were factored in, so sometimes increasing the cost from 2 up to 4% of the sum invested on an annual basis. These charges may seem alright but over time they have a massive effect on the amount the investor ends up with.
So, in summary, a good start by the FCA on brokers and IFA charging but more transparency is needed at fund management level to ensure consumers are fully aware of the overall charges they are paying for investments and advice.
Redress Law specialises in advising and representing clients who have been mis sold financial products, experienced financial adviser negligence or generally taken for a ride by the financial services industry.
