The New Approach to Financial Advice

How it’s changing, why, and what it means for you

The new approach to financial advice

THINGS ARE CHANGING

Good advice is a great investment Over the last few years, financial advice has been undergoing a transformation.

Advisers have been investing in higher qualifications and introducing more transparent ways of charging. By the end of this year, only advisers who meet the higher professional standards will be able to give advice. We explain exactly what’s been changing and what it will mean for you.

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THE BIGGER PICTURE

It will be easier to understand and compare different types of advice

How financial advice has been changing

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FTER 31 December 2012, new rules come into force around the way you receive financial advice on investment products, such as pensions and ISAs. Advisers have been preparing for the new regulations over the past few years. The rules have been introduced by the Financial Services Authority (FSA) to ensure consumers fully understand the charges and process for receiving financial advice. There are three main changes: more transparent charges, higher qualifications for advisers and clearer distinctions between different types of advice.

These aren’t radical changes.

You’ve always paid for financial advice, either in the form of a fee or through commission from a product provider. But, from January 2013, advisers will have to explain the type New FSA regulations ensure that consumers understand the charges and process for receiving financial advice.

of service they provide and agree with you how much they’ll charge you for advice, as well as how you’ll pay for it.

The changes have been welcomed in the industry. Nick Cann, chief executive of the Institute of Financial Planning, says: “More transparent charges and increased requirements around qualifications will give consumers more confidence in the advice they are paying for. It’s a very positive move.”

Karen Barrett, chief executive of unbiased.co.uk, the professional advice portal, also embraces the changes, saying they’ll lead to a better understanding of financial advice.

“People will become better informed about what’s available, and that will be very empowering,” she says.

By moving away from productbased sales, financial advice is becoming much more strategic.

Advisers can develop financial plans that help you achieve your lifetime goals, whether this is saving for future university fees or building a pension pot.

Fay Goddard, chief executive at The Personal Finance Society, says this can be invaluable. “Professional financial advice can take away your worries and give you the reassurance that you’re doing the right thing. It can change your life.”

People will be better informed and that will be very empowering

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THE NEW RULES IN DETAIL

THE NEW RULES IN DETAIL

These changes will formalise qualifications within the profession

There has always been a charge for financial advice. Now fees will be more transparent

The new rules clearly distinguish between the different types of advice available

What’s changing: the detail

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or a number of years, advisers have been preparing for the introduction of new rules, known as the Retail Distribution Review (RDR). These affect the way financial advice is delivered and how you pay for it. These rules not only formalise qualifications within the profession, they will also make it easier to compare the service offered by advisers and understand the value of the advice you are given. Here are the three main areas that are changing.

from your investments. It’s up to you and your adviser to decide which method suits you best.

The rule change won’t affect the existing commission your adviser receives on products bought before 31 December 2012. But, if you do require advice on these products, your adviser cannot receive any new commission and they’ll need to agree a charge with you for that service.

2. The type of advice offered Advisers will either be independent or restricted, depending on the nature of the advice they provide.

Independent advice

Many advisers have already invested 1. How you pay for advice in higher Under the new rules, your adviser qualifications must explain how much their advice will cost and agree these charges and have also with you before they carry out any moved to fees work for you.

The way you pay for advice will also change. Rather than pay commission, you will either pay a fee for the advice you receive or you can agree to have the cost of advice taken

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To be independent, your adviser will need to offer advice on all the financial products available in the market, without any restrictions or bias towards a particular product or provider.

Restricted advice A restricted adviser will focus their advice on a specific range of products.

This may be because they specialise in an area, for instance pensions, or because they work with a select number of product providers.

Importantly, whether an adviser is independent or restricted, they will

need to tell you, and explain any restrictions, before they provide you with any recommendations. This will make it much easier for you to see what type of advice you will be receiving and whether it will be suitable for you.

3. Higher qualifications All financial advisers will be required to hold a higher minimum qualification, although some may want to invest in further qualifications. At the moment, advisers must be qualified to at least level three of the Qualifications and Credit Framework (QCF), which is roughly equivalent to an A-level, but, from January 2013, the minimum

It will be easier to compare services and understand the value of advice

qualification will be set at level four, which is equivalent to the first year of an undergraduate degree.

There are many different recognised qualifications at this level, covering a broad range of advice areas, including investments and investment risk, pension regulation and tax.

As well as demonstrating their knowledge and expertise with higher qualifications, financial advisers will also have to spend at least 35 hours per year studying as part of their continuing professional development.

They will also be required to sign up to the Financial Services Authority’s code of ethics.

You’ll be able to check your adviser meets these standards by asking to see their Statement of Professional Standing (SPS). This is a certificate issued by an accredited body, such as the Chartered Insurance Institute, and demonstrates they meet these new, higher professional standards.

Finally, it’s worth noting that many financial advisers have been ready for these changes for some time, having already invested in higher qualifications and moved to fee-based charges.

Find out how the advisory process works and what happens at each stage

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THE ADVICE PROCESS EXPLAINED

How your adviser works Face-to-face meetings and phone calls are at the heart of your relationship with your adviser. But developing a financial plan that will help you reach your goals also involves hours of preparation, strategic thinking and research. Here’s how the process unfolds…

A six-step process 1. initial contact

What your adviser does at each stage

Points for you to consider 6

2. the review

3. prepare recommendations

4. discuss recommendations

5. implement plan

6. Review Plan

Your adviser will contact you to arrange a convenient time and place to meet.

Here, your adviser gets under the skin of your finances and helps you identify your goals.

Using the information gathered, your adviser develops a detailed financial plan.

Your adviser will take you through their recommendations in detail.

All the necessary product paperwork is completed and processed.

At this point, you’ll agree how often you want to review your plans.

You’ll be asked to gather as much financial information as you can in advance of the meeting. This is also an opportunity for you to outline the issues that you’d like to discuss.

They should provide details of the services and a menu of charges, plus information on whether advice is independent or restricted. They’ll look at your assets and liabilities, discuss your objectives and priorities and also assess your attitude to risk.

They’ll research the market, reviewing a wide range of products and providers. The next step is to prepare a document outlining a strategy tailored to your individual goals and circumstances.

They’ll explain why they’ve chosen specific solutions, and outline product features. Your adviser will agree next steps with you; they’ll also confirm actual costs in cash terms with you.

Your adviser will make sure that all the recommendations that you’ve agreed have been implemented. They’ll also liaise with your accountant or solicitor if appropriate.

The frequency and level of contact you have with your adviser is up to you. It could be faceto-face, over the phone or by email. If your circumstances change, let your adviser know so they can review your plans.

Gather financial documents, including life assurance, mortgage, pension, savings, investments or bank statements. They’ll provide a clearer picture for your adviser.

If there is anything you want to ask, now’s a good time. What qualifications do they hold? What service do they provide? What are the costs associated with the advice?

Does the financial plan fit in with your life plans and are you comfortable with the timescale for implementing the plan?

Understand why the recommended products or advice strategy are right for you. Do they require future work; if so, what will it cost? Ask how you can check on investment performance.

Make sure you know who will be your main point of contact and how best to contact them.

Likewise, make sure your adviser knows how you like to be contacted – letter, text or email?

Keep your adviser in mind when your life changes – getting married, having a baby, a promotion or buying a new house are all events that may affect your finances.

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REAL LIFE

WHAT TO ASK YOUR ADVISER

Jean Bennett realised her lack of financial knowledge could prevent her achieving the best returns

“I’m reassured that I’m doing the right thing”

Five questions to ask your adviser

ive years ago, Jean Bennett, a 59-year-old local government officer from Surrey, decided to take independent financial advice. It’s a decision she doesn’t regret. “From reading the personal finance press I realised that my understanding of financial planning was fairly limited and would prevent me achieving the best possible return,” she says. “By using an adviser I have the reassurance of their expertise.”

As these changes will affect the way your financial adviser runs their business, preparations will already be well underway. These questions will help you find out how the service you receive may change after 31 December 2012.

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also helped with nursing home fees planning for Jean’s mother. “When my mum moved into a nursing home we sold her house so we could use the proceeds to pay for her care. She could live to a ripe old age so it’s good to know her money is managed to last too,” she says.

KEEPING AN EYE ON PERFORMANCE

sorting out retirement plans Over the five years her adviser has helped her and her husband with a number of areas of financial planning.

“Our adviser has given us advice on our investments, ensuring we have a good spread of different funds. This gives us the security that if one fund isn’t performing well it won’t have a significant effect on our overall portfolio,” she says. “We also took advice when my husband retired with our adviser working through the various options to ensure he received the highest possible level of income in retirement. It made a significant difference.”

helping plan long-term care As well as advising them on their investments and her husband on his retirement options, their adviser has 8

It’s a good, professional service and I would expect to pay for it.

Jean receives regular updates on all the investments and, if something isn’t performing as well as it should be, or a new investment opportunity arises, her adviser calls her to discuss it. “It’s good to know they’re keeping close tabs on everything,” she adds.

In terms of the cost of this advice, Jean pays a fee in the form of a percentage of her investments. “I do feel I get value for this,” she says.

“It’s a good, professional service and I would expect to pay for it. It gives me the reassurance that I’m doing the right thing.”

Case study provided by AWD Chase de Vere.

What type of advice do you plan to offer after 31 December 2012?

Some advisers will continue to offer independent advice but there will also be some who decide to offer restricted advice, where they provide advice on a specific product range or area of personal finance. Others may offer a combination of independent and restricted advice.

What qualifications do you have and are these at the level required under the new rules?

Many advisers already hold qualifications at the necessary level or above, but it’s worth checking these are in place and, if not, whether your adviser is planning to achieve them before the introduction of the new requirements.

You and your adviser need to agree charges

How do you keep your skills and knowledge up to date?

The new rules require advisers to undertake a minimum of 35 hours of continuing professional development a year. Some will already have a Statement of Professional Standing, which proves they have done this.

How will I pay for your services from 2013?

You and your adviser will need to agree charges for any advice you receive after 31 December 2012. You may also want to discuss how they will treat any ongoing commission they receive on products that you already have.

Will your processes be changing?

Changes could affect the level of advice you receive and how often you see or have contact with your adviser, so make sure they keep you informed of anything that will affect you.

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REAL LIFE

Kelly Cornick’s adviser helped her sort out her pension and get her family’s finances on a firm footing

“I wanted flexibility as my career progressed”

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eeping herself and her clients in top condition is second nature to Kelly Cornick, a 28-year-old fitness instructor and mum of three, Cameron, nine, Grace, four, and Alfie, 18 months. But, four years ago when she was offered a pension by her employer, North Dorset District Council, she decided she needed to take the same approach with her finances. “I knew it was important to save for my retirement,” she says. “I’d already built up a small pension from the four years I spent in the Army, but I wasn’t sure whether to take out this pension.”

finding the right solution While there was nothing wrong with the pension she was offered, Kelly wasn’t sure it was right for her. “At the time, there was some uncertainty over whether the council would be able to continue running the leisure centre I worked in. I couldn’t be confident about how long the pension would be available, or given the situation, whether I’d stay there,” she says.

“I wanted a pension I could save into as my career developed.” A short time later a private company took over the leisure centre.

To help her work through the options, she arranged a meeting with an independent financial adviser.

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Following the meeting she took out a personal pension. “It’s great to know that, wherever I work, I can use this pension to save towards my retirement,” she says. “I pay around 7.5% of my salary into it each month and I’ll look to increase this as my career develops.”

…goes beyond finding the right solutions.

securing her family’s future As well as helping Kelly to set up a pension, her adviser also worked with Kelly and her husband Andy, a director of a building company, on other elements of the family finances. This included arranging a mortgage for them and, with the couple having three children, putting life assurance in place.

KEEPING IN TOUCH Kelly receives regular updates on how her pension is performing and is happy to contact her adviser whenever she needs additional advice on other areas of her finances. “We’ve paid for advice through commission in the past,” she adds, “but even with the changes it’s good to know we can get professional financial advice whenever we need it.”

The real value of expert advice…

It’s good to know we can get professional financial advice whenever we need it

It lies in the experience that your adviser brings to the relationship. Not everyone has the confidence to navigate the world of finance on their own.

A trusted adviser can open your eyes to opportunities and provide vital reassurance that you’re taking the right steps to bring your plans to life.

Kelly Cornick used Shape Financial.

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The new approach to financial advice

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