Before the end of the year, the first phase of amendments to advice and product fees will come into effect under the Retail Distribution Review (RDR). This is a positive development for both clients and advisers as it will create a more transparent, fee-based structure.
Historically, under a product commission structure, clients did not always understand the value of the advice provided, considering it to be a “free service”.
Under the new fee structure, however, advice is clearly paid for as a valued service. This also means that advisers need to be more client-centric in terms of providing on-going and relevant advice. Legislation allows clients to discontinue their on-going advisory fee on investment products if they feel their adviser is not providing an adequate service.
Liberty advisers have already been aligning their practices to meet the requirements of the RDR, but it’s important for clients to understand exactly what they’re paying for and what to expect in terms of advice.
- Upfront advice: An adviser would be required to provide a needs analysis to assess your financial requirements. Most leading financial planners follow the internationally recognised Financial Planning Institute’s six-step process for identifying a client’s current financial knowledge and experience, and current financial situation. The gap between the current situation and the desired outcome helps to create the financial plan.
- On-going advice: In addition to handling day-to-day queries or claims, an adviser should also undertake a financial review of their client each year. At this time, changes to personal circumstances and whether or not you are on track with your financial plan can be discussed.
How fees will be charged
Under the RDR there is a differentiation between risk and investment products. However, in both models there is an emphasis on remuneration for on-going service. The RDR proposes that wherever a fee is charged, it must be clearly disclosed upfront and agreed to by the client, which puts the client in a position to negotiate the fee should they wish to.
Advice fees on investments
The RDR will prohibit product suppliers, such as Liberty, from paying commission on investment policies.
In the first phase, only lump sum investments will be sold on an “advice fee only” basis, with recurring investment products to follow in the next phase. The advice fee needs to be agreed upon between the adviser and the client, based on the level of service and advice required. Platform fees and portfolio management fees will be levied separately and will be clearly disclosed in line with the principle of transparency.
Advice on risk products
In terms of risk policies a model is proposed that will limit adviser remuneration to a maximum of 50% upfront commission and the balance to be paid “as and when” the premiums are paid. This means that if the client changes advisers, the new adviser would receive the ongoing service fee. This creates the motivation for ensuring ongoing service once the policy is sold.
Types of fees incurred
Advice fee: This is the fee payable by the client to the adviser for the advice provided. It needs to be contractually agreed upon before the adviser provides the service so that the client knows what they are paying for and the adviser knows what to deliver.
Platform fee: This is the fee charged by the platform that administers your investment. The RDR proposes that only the fee levied by the platform must be payable and that it is free of any rebates or third-party remuneration from product suppliers or investment managers.
Portfolio Management fee: This fee is charged by the portfolio manager for their expertise in managing the fund and must be disclosed to clients.
Share this article:
Linked In | Facebook | Twitter | Email
|
