Shake-up ahead for financial advisers

KNOWING where to go for quality financial advice has always been one of the most pressing issues for consumers. The sad fact is that such advice is largely available primarily to the wealthy, because they are the ones prepared to pay for it.

Many consumers are taken aback at the scale of fees which a reputable financial adviser will charge to guarantee you receive unbiased recommendations.

They will often prefer an alternative adviser who requires no payment upfront. However, such professionals will still charge for their service by taking a commission. Customers still pay indirectly, as the adviser helps himself to a chunk of your nest egg or regular premiums to pay for his time.

This is all due to stop by the end of next year, when commission will effectively be abolished. Chief watchdog the Financial Services Authority has ordered a major restructuring of the sales process of investments and pensions.

The problem with commissions is that they can distort the advice which investors receive. At its baldest, for example, an adviser can receive around 7 per cent of any investment you make as commission if he recommends an insurance bond. By contrast, a National Savings & Investments tax-free bond will pay no commission.

In other cases, the same investment can pay different commissions depending on the company recommended. Often those with poorer performance pay more commission.

The rug was pulled from under the industry with a key report six years ago, from actuary Ned Cazalet. Entitled "Polly Put The Kettle On", he argued that commissions paid in respect of new sales were a misnomer, because there were no new sales. Advisers simply passed existing nest eggs from company to company, earning new commissions each time.

Indeed, last week the FSA levied fines totalling 143,500 against two firms for doing just this. Perspective Financial Management (PFM), based in Milton Keynes, was fined 49,000, while Cricket Hill Financial Planning Ltd (Cricket Hill), in Barnsley, was fined 70,000, along with the firm's director Jeremy Sheard, who will pay 24,500.

It emerged that at Cricket Hill advisers were routinely recommending customers switch their pensions to a pension fund risk management service in which Sheard owned shares. The firm could not demonstrate the suitability of this advice, particularly as most of its customers were unsophisticated financially and had small pension pots.

At PFM, the FSA found evidence of unsuitable pension advice in five out of the nine cases reviewed, with customers incurring switch costs for no benefit.

The regulator hopes to smoke out such activities via three major changes due to come into force in 2013. Essentially, anyone offering advice must spell out upfront precisely what kind of service they are offering, what that service will cost and how it will be paid for.

In future, advisers must pledge to offer purely independent advice, whereby they analyse the whole market and pick the best product for the client's needs. Alternatively, they can offer "restricted" advice, whereby they can only sell certain limited products. However, they must spell out to the client the nature of those limitations.

Next, the customer must be told how much the service will cost.

Finally, there will also be new standards of ethics and professional attainment.

Many advisers, who despair at the poor standards elsewhere in the industry, welcome the moves towards greater transparency. They believe the outcome will be a service which consumers will trust.

Others are more sceptical and take the view that the watchdog is simply rearranging deckchairs on a sinking ship. Time will tell.