Advisers must prove their worth to you

The cost of advice is likely to come down following the implementation of proposals contained in the Retail Distribution Review (RDR), Phil Billingham, a chartered financial planner with Perceptive Planning in the United Kingdom, says.

The RDR proposals, which were released by the Financial Services Board in November last year include a major overhaul of the way in which you pay for financial advice. Most significantly, they advocate limits on commission earnings and, instead, advisers earn defined, negotiated fees for advice or services rendered to you.

A good financial adviser will have a value proposition that makes it clear to you why you need and are willing to pay for his or her services, Billingham, who is regarded as an expert on the RDR process that took place in the UK, says.

He says the UK’s experience has been that, since the reforms two-and-a-half years ago, the number of advisers has fallen by 20 to 24 percent. There are 9 000 fewer financial advisers in the UK than there were in 2012, before the reforms were implemented.

However, Billingham says, RDR in the UK did consumers a favour by breaking down the model in terms of which you were offered extremely expensive advice by your bank.

Some 5 500 advisers who stopped practising as advisers in the UK were employed by banks and some 2 000 were in wealth management businesses, he says. There was a 12-percent drop in independent financial advisers, he says.

Billingham says the UK banks needed to earn an upfront commission of about seven percent on investments in order to be profitable, and this was not sustainable.

Advisers in wealth management businesses were earning twice the amount in fees that independent advisers were earning, and the reduction in their numbers means that the profit margins of asset managers have been squeezed, Billingham says.

Billingham says many people need simple advice, which is to spend less, save more, insure the breadwinner and make a will. This can be delivered at a cost of closer to 0.05 to 0.1 percent of the amount you invest, rather than the two to three percent that some consumers have been paying.

Billingham says the financial advice firms that have succeeded in the UK are those that do not aim to sell you something, but clearly tell you what they can do for you in a way that ensures that you are willing to pay them a fee. – Laura du Preez