Investors' best interests not met by FSA's new rules on advisers' pay

Most of us learn at school that life isn't always fair and that sometimes the innocent are punished along with the guilty. If the teacher doesn't know who let off the stink bomb, the whole class will suffer.

The UK retail investment industry is currently being kept in after school because teacher - the Financial Services Authority (FSA) - has detected a stink and has decided that the best way to clear it up is to give each pupil a mop.

What is the stink, and what is the mop? The FSA feels that the overall standard of advice provided to consumers is uneven and that a major reason for this is the way advisers are paid. It says too many people have investments which are not suitable and whose risk profiles are not properly understood, and that the current structure of adviser remuneration does not sufficiently encourage sensible, client-orientated advice.

The FSA believes the problem is that the money which pays the adviser does not come directly from the investor; it comes indirectly via the provider. The provider can take a substantial amount out of the investor's cheque and pay it to the adviser. On top of this one-off charge, every year a slice of the annual management fee may be paid over to the adviser.

The FSA has therefore decided that from January 2013 the "indirect" route will be forbidden for new business and that clients must pay their advisers directly. From a personal perspective I am pleased to say that the advisers we have worked with over the years have always placed the clients' interests first. The FSA directive should continue the process started with the Financial Services Act 1986 of ensuring a level playing field for our clients which must be good for all.

There is a second mop - a ruling that advisers must be able to demonstrate their technical competence not by years of actually doing the job but by having or acquiring an exam-based qualification. This has caused particular wailing and gnashing of teeth amongst the most senior and experienced advisers, who last sat an exam when Jim Callaghan was prime minister.

Attempts have been made to warn the FSA about the law of unintended consequences. It has been said that customers are so reluctant to pay an upfront fee to an independent adviser that many of them will give up and just go with whatever in-house product their bank recommends. This forced lack of independence is not obviously in the client's best interests.

It is equally unclear how the early retirement of capable practitioners is, in itself, going to improve the overall standard of advice to clients. However, recent statements from the FSA extinguished whatever faint hopes some may have had that they would reconsider the fundamental thrust of their reforms, and we now have to work with what we have been given.

Like all professions, most advisers are competent, some are outstanding and a very few should be put out to pasture. The burden of getting rid of the latter has been placed on the shoulders of the former; many firms have already changed to a fee-based model, and have not suffered a mass defection of clients; many advisers are sharing kitchen table space with their children as they do their homework and prepare for exams.

More forward-looking firms see the reforms as a chance to gain a competitive edge. They think by emphasising the quality and relevance of the ongoing advice which they provide, they will bind the clients more closely to them than was ever the case when so much effort went into clinching the crucial sale, arguably at the expense of after sales service. Many advisers are also deciding whether they want to continue providing a full service, involving both advising on the overall structure of the client's affairs and making the actual day to day investment decisions within that structure, or whether they want to concentrate on the overall strategy and delegate the investment function to specialist managers.

Whichever choice is made, the FSA's objective is that the client should be able to see how much he is paying for advice, how much for investment management and make an informed judgment in both cases as to whether he is getting value for money. The windows have been thrown open, the mops have been at work and the smell is fading away.

• Gareth Howlett is fund manager director at Brooks Macdonald Asset Management.