Finally it’s here. The Retail Distribution Review (RDR). We’ve been campaigning for it for years and giving you the details in the magazine for months. But the change has actually come. From now on, independent financial advisers (IFAs) will no longer be paid for giving you advice in the form of commissions paid by the providers of the products they advise you to buy. Instead, you will pay an agreed fee direct to your IFA.
The result? Commission bias – the risk that IFAs suggest you buy products that pay them high commission, rather than products that suit you – is going, and so, I suspect, are a lot of the worst financial products.
Let’s not forget how the cycle of commission has worked: in the past, the more money a provider has been able to make from a product, the more commission he has been able to pay, and so the more likely an IFA has been to recommend it. The worst products have carried the biggest incentives, which is something on which you can blame almost every scandal in the financial services market over the last couple of decades.
The other big (and good) change is that your IFA will be better qualified: he has had to take exams equivalent to the first year of a degree course. You might be horrified to hear he wasn’t that qualified before, but that, I am afraid, has been the way of it. And at least he is now (if he isn’t – or has found that the exams are beyond him – he isn’t supposed to be working anymore, so you might want to check).
The RDR isn’t perfect. The platforms on which most MoneyWeek readers invest can still take trail commissions (a commission for every year in which you hold a fund you buy through them) and probably will be able to for another year.
In some cases, that will make them more expensive than going to an IFA and paying him to buy the funds for you – www.rplan.co.uk has an excellent calculator so you can check. Commission will still be payable on life insurance, income protection and critical illness insurance (we’ll need to keep campaigning on these).
At the same time, it is possible that IFAs will lead an undignified race to the bottom on price – using only the cheap exchange-traded funds, deposit accounts and investment trusts they have ignored for the last 20 years, and avoiding anything actively run instead. But these are teething problems.
Overall, the RDR is good news. People will no longer make the mistake of thinking that financial advice is free (a Financial Services Authority survey in December showed that 33% still do). And we now have an industry staffed by people who are reasonably educated in their subject and no longer able to invite bribery. Hooray.