Adviser Fees

Current (pre RDR)

Currently structured products incorporate all provider and adviser charges, typically including both an initial and ongoing commission for the intermediary, into the way products are designed and priced.

After the RDR commission of this nature will no longer be allowed, which means clients will receive higher returns for their products but will have to pay advisers through a separate arrangement.

The net result after accounting for the adviser fees will be similar, albeit not always better for the client as the investments will no longer accommodate the recovery of the cost of the advice as standard - another unintended consequence of RDR

But the industry says the new rules could result in a collapse in advice, especially for the middle market, with only the wealthy able to afford the £100-£250 an hour fee specialists may start to charge for investment advice from 2013. Others expect the changes to herald the arrival of the DIY investor, with scores of new low-cost websites offering easy-to-use services, meaning that most people will be able to dispense with the costly, and at times dubious, service provided by financial advisers.

What investors pay now?

When you buy an investment fund(such as a stocks and shares Isa) you pay an initial charge (typically 3%-5%) and an ongoing fee, called the annual management charge (typically 1.5%). On top of that, investors lose another 1% or so every year in costs taken from their fund, for things such as buying and selling shares.

What will investors pay in future?

The buzzword is "unbundling" so you can see how much of the cake the adviser, fund manager and administrators take. Currently, of the 1.5% annual charge, 0.75% is kept by the fund manager (such as Invesco Perpetual, M&G or Jupiter), 0.25% goes to the fund "platform" provider (eg Fidelity Funds Network) on which your fund sits and is administered, and 0.5% goes as commission to the financial adviser who sold the fund to you. In future, most advisers are likely to charge a "fee" of 0.5% on the amount invested instead of a commission.

How can investors save (post RDR) ?

The 0.5% to advisers is the money up for grabs. The trick for DIY investors is to buy through an online seller, pay the 0.75% manager fee and the platform fee of 0.25% but try to get the 0.5% adviser fee back into your fund, and scout around for managers who charge less than 0.75%. If these sums sound trifling, they're not. Over 10 years, on a £10,000 investment, they could be worth more than £3,000.

The other trick is to look at the type of fund. Commission-based advisers have tended to push unit trusts as they contain the upfront 3% commission and pay 0.5% in "trail". They haven't pushed investment trusts, which don't pay commission, but which are generally cheaper to buy.

Future (post RDR)

Adviser charging will not apply to business where advice was given before 31 December 2012. This is referred to as "legacy business". Advice given from 31 December 2012 must be paid for by adviser charging.

All products (investment, savings and pension products) that are sold outside of the UK are not affected by RDR.

All new business and advised top ups and increases from 31/12/12 will not be able to generate initial commission or additional trail commission.

Trail commission can continue unchanged on legacy business where no advice is sought or where advice results in:-

· no change to the product

· a reduction in the investment amount or regular premiums

· a change between income and accumulation units

· a switch within a life policy

· automatic rebalancing based upon pre-31/12/12 advice.

The legacy products will only be impacted by RDR if they are topped up or regular premiums increased following advice provided by an adviser from 31 December 2012 and the client is UK resident.

Should investors transfer existing investments?

It should be worthwhile, A lot of the start-ups are gunning for Hargreaves Lansdown, far and away the biggest investment advisers in the UK. It currently charges around 1.5% a year for a fund, minus a loyalty bonus of 0.25%. It won't release its new charging menu until next year (a peculiarity of the rules is that "execution only" is excluded from RDR for now).

Can investors just go direct to the fund management company, bypass the adviser, and save?

Yes and no. Schroders and JP Morgan have taken the lead in offering "clean" units at low prices. Schroders UK Core fund now charges just 0.35% a year all in. The problem is that these companies do not want to deal directly with investors, so you still have to buy across a platform or online dealer. If you go direct to Schroders, it will charge 1.5% a year for the same product. Buy through Cavendish and it'll be 0.6%, or 0.35% at Saxo for one year only. Invesco Perpetual, home to the UK's most popular fund, will charge 0.75% if you buy via a platform but 1.5% if you go direct.

"Execution only business"

People who do not want advice but still require various financial product to be set up for them. Advisory firms will only act as intermediary and will not give or offer any advice on any part of the transaction. A transaction is executed by advisor upon our specific instructions, and where advisors do not give advice on investments relating to the merits of the transaction.

An 'execution only' transaction is viewed by the Financial Services Authority as a case where you have:

(1) Identified the product you require

(2) Stated the premium you are willing to pay or the amount you are willing to invest

(3) Selected the product provider you wish to do the business with

(4) Selected, if appropriate, the fund

(5) Selected, if appropriate, the term of the contract

NO ADVICE has been SOUGHT by you (the client) or GIVEN by us (the adviser), nor is any advice EXPECTED by you (the client).

Adviser Fees

Adviser fee charges are only applicable to the fee bearing assets

The service provided by an agent for a given transaction will be classified as commission or fees, based on the following and the responses to the questions by the adviser:

Advice Given èYes or No (determines execution only)

Remuneration èFee or Commission