2nd January 2014
The overall cost of accessing financial advice has fallen because of the ban on commission which reached its one year anniversary on January 1st.
Investment platform and financial advice firm Hargreaves Lansdown has given its assessment of the winners and losers from the Retail Distribution Review, the big shake up in regulations which saw commission banned.
The firm’s head of financial planning Danny Cox says that advice costs are continuing to fall since the ban on upfront commission.
Mr Cox says that typical advice costs are now 3% up front with 0.5% to 0.75% for on-going advice or 1% up front plus 1% for on-going advice.
He adds: “One considerable benefit of the RDR is that advice costs have fallen, particularly with the increase in popularity of DIY investment and telephone advice services. In the past investors might have paid 6% or more in commission but now should not be paying more than 1% for straight forward investment advice.”
But continuing with his list of benefits, he also includes
Improvements to how adviser remuneration is disclosed and paid for
Improvements to professional standards and the quality of advisers – the reduction in numbers of banks and building societies offering financial advice evidences this says Cox.
DIY investor services – the growth in numbers of services and the growth in the numbers of people using these – 85% of investors plan to make some or all of their own investment decisions (source: Platforum)
Low cost telephone advice services. Cox says HL has seen a 73% increase in investors wanting to take advice by phone as opposed to face to face meetings.
Finally he adds that passive investing has seen record inflows though this may show some advisers are looking at lower cost solutions to maintain their margins.
The following is his losers’ list.
Adviser numbers are expected to fall though, he says, there is no evidence of that yet.
Cox adds: “The FCA recently said the number of people authorised to give advice has increased by 5%. This is more likely to be due to an increase in the numbers of compliance and sale managers.”
Insurance companies: the ban on indemnity commission has seen sales of insurance investment bonds plummet – Aviva down 70%, Prudential down 20%, L&G no longer offering with profits bonds.
The smaller IFA: the continuing trend is for consolidation as the increased costs of improving professional standards, capital adequacy and compliance, combined with reduced initial remuneration bites.
Mindful Money view:
We tend to agree that many of these trends identified are very good for investors. These include higher standards of advice and better disclosure of what you are paying for – if investors are getting that for less than even better. The decline of the bank and building society sales forces seems to be no bad thing as a recent record fine for Lloyds Banking Group demonstrates too. Standards do not seem to have been high enough at very least on average for anyone to want to mourn the closure of many bank advice sales forces. Yet if some people are happy to go to their bank to buy an investment fund, we are not certain we would want to deny them the option entirely. Additionally, the number of do it yourself investors is set to grow. That is actually a mixed blessing if people have lost access to advice unwillingly. If they do the homework it should be possible to create a decent portfolio themselves but advisers when they do the job right can add substantial value especially around issues such as retirement and estate planning.
The increase in passive investing is broadly good news too, providing people understand why they have more passive options in their portfolios. As for the fall in insurance bond sales, we suspect that bonds were often, though not absolutely always, recommended when a simpler pension or Isa tax wrapper may have done.
But it is the fall in the cost of advice which is probably the best news, for those currently using an adviser now or who may plan to do so in future. One last point. Hargreaves Lansdown is clearly one of the bigger winners though Mr Cox could not, of course, include his own firm on the list of winners.