The Impact Of An FSA Review On Investors Wallets
On the list of better core values in modern day business is transparency, especially with regards to fees for services, products and investments. Responsible financial businesses are welcoming the changes due to be implemented as a consequence of the Financial Services Authority (FSA), Retail Distribution Review (RDR).
The RDR is the FSA’s response to consumer calls for truly independent savings and advice. These changes are going to be introduced from the end of December 2012. However, several financial advisers are adopting them early. The headline grabber is the much-expected ban on commission.
Advisers will need to clearly outline and agree fees for advice with prospective clients before providing it.
This change to the way in which products are sold will have fundamental implications for the entire savings and investment industry, because advisers will need to consider how they will change their business models to support new charging structures, while product providers will have to specify and create commission-free products.
Currently we have a system whereby the financial adviser’s remuneration is often linked to the sale of a product by the way of a commission. In some instances this has led to miss-selling and also product prejudice. The RDR wants to deal with this through unwrapping the product from the agent charges.
In addition to being fair and transparent, these charges are specifically important in these hard times. Part of your own review may involve attaining a clearer knowledge of the fees and costs sustained for investments and other financial products you purchase.
To look at an example of a common product such as a stocks and shares Individual Savings Account (ISA), chances are an initial charge may have been incurred (anything up to 6 percent, but more usually three percent). This will most likely cover financial adviser commission or costs as well as product charges. On an annual basis there will be on-going charges typically made up of fund manager’s costs, plan charges, dealing costs, agent commission or fees and platform charges.
The fees and charges tend to be deducted from the customer’s investment and have the impact of reducing the total returns, although it is reasonable to say that the value of the ISA may well have increased despite deductions. Even so, in most instances the yearly management charge does not present the full picture and a better idea of this is represented by the Total Expense Ratio (TER) and that is usually greater than the yearly management charge.
The TER supplies investors with a better picture of the total annual charges. It consists primarily of the manager’s yearly cost, but also includes the expenses for other services taken care of by the fund, such as the fees paid to the trustee (or a depositary), custodian, auditors and registrar. Collectively, these fees are known as “additional costs”.
In addition to the TER there could be additional expenses if your ISA is on a platform. A number of financial advisers use platforms to hold clients investments to produce efficiency of management. The typical price of a platform is 0.5 percent per year.
After RDR it should be made clearer as the focus changes from product sale to service. Fee-based chartered fiscal planners encourage these particular improvements as it can only improve the way the market is viewed. Their key focus will be their customers first and foremost, and they will agree a price with them for an applicable level of service. Products are secondary to this partnership and that is exactly how it should be.