(Feel free to skip to the last paragraph for the quick version of this article!)
If you have a financial advisor you may find they either have, are in the middle of, or plan to increase their charges very soon.
If so, this is all part of the move to get ready for the Retail Distribution Review (RDR) which comes into effect on 1 January 2013.
You can download our free guide Financial Advice is Changing, which highlights some of the key factors to affect the financial advice industry over the coming months.
I guess what you really want to know is why charges are increasing and whether that will affect you. Put simply, there are a number of requirements that are being imposed on financial advisors in order for them to even be authorised to give advice after 1/1/2013, and for that advice to be compliant with FSA requirements.
My own view is that the single biggest factor causing advisor charges to increase is, ironically, the requirement to agree a fee with you, the client. In the past, many advisors have worked on a commission basis where advice is provided, the financial product is bought and a commission is paid to the advisor from the provider.
This was always a very back-handed way of charging you, because the commission from an investment, e.g. an ISA, would come out of your account as soon as it is opened but before the money is invested.
What the FSA has said is that from 1/1/13, all advisers will have to agree with their clients a fee for the service they are providing, and clients will have to approve this. It is a fairly obvious and clean way of working, but one that has massive implications.
What that change from commissions to fees does is put the cost of advice in your face so that you know exactly what you are paying when an advisor arranges a financial product for you. This naturally causes people to question the value of the advice. Once we know the price of something we, as consumers, want to know what we get for our money.
It is because of this fundamental change from being paid by the product provider to being paid by you, the client, that financial advisors are busy working on their advice processes and businesses. What advisors are finding is that in order to justify the fees they are charging they have to present a professional approach to the advice they give.
Worrying as it might be that means many advisors are having to change much of what they do. So if you have an advisor already you may have had conversations with them about how they are improving what they do and working on different ways to offer you a better service. This is all due to the fact that they are having to do this in order to be prepared to have that conversation with you about the fees they charge.
Of course some advisors already have this approach in place and have done so for years, some have been charging clean fees, with no commissions, for years. The majority, have not.
So now we get to why this means advisor charges are increasing. Well, with all this extra work being done to improve the quality of advice process and reporting plus, no doubt, the addition of financial planning services which your adviser will tell you is their way of doing things going forward, it is basically costing the advisor more money to provide this.
Therefore in a twisted kind of way, in order for you to agree to pay a fee to your financial advisor for advice, they are having to increase their charges, to fund the changes to their business that will make them more professional, which will enable them to convince you that their fees are value for money.