The end of 2012 will see possibly the most significant change that the market for independent financial advice has experienced during the last 20 years.
As businesses prepare for auto-enrolment there is another government initiative which is expected to have a significant impact on the cost of delivering pension plans to your employees. It starts at the end of 2012, and is already leading to major changes in the design of pension (and other investment products) being offered through independent financial advisers (IFAs).
What new regime I hear you ask?
The retail distribution review (RDR) was principally focused on improving the professionalism of the IFA market. Its findings, which are being enacted from the end of 2012, should lead to a cultural shift in the way that people access financial advice in the UK. It will certainly lead to a change in the way most people and businesses pay for their advice.
Two of the changes in particular will have a notable impact on the market. They are new minimum exam qualifications for advisers and the outlawing of up-front commissions.
A number of financial advisers are expected to struggle to meet the new qualification criteria, and as a result may cease to trade.
Many IFA firms are/have been heavily dependent on commissions generated by insurers. It is not surprising then that the most visible change to be felt by most people will be as a direct result of the outlawing of most types of upfront commission payments from the end of 2012.
The option for a financial adviser to introduce new business to product providers (largely insurers) and be paid a large lump of commission upfront for advising on the sale will soon become illegal.
Gone will be the days of supposedly 'free' financial advice (the cost of which was actually paid for through commissions from product providers via products carrying high ongoing charges). The removal of the perception of 'commission bias' as a result of up-front commissions was one of the key objectives of the RDR.
We expect that the new (largely-fee based) system from January 2013 will see a number of advisory businesses closing or changing their business model significantly as they struggle to maintain cash flow while making the transition to fees.
As you would expect, product providers are also busy updating their products to compete in the new market.
New is not always better (or cheaper), the challenge is therefore to get the best outcome from the two regimes currently available. During the transition between the old and new structures, you have a brief window of opportunity to benefit from our detailed knowledge of the market.
By way of an example, a benchmarking exercise we conducted for a group personal pension client recently resulted in a reduction in member costs of around 30%, an improvement in the quality of default investments and the delivery of a structured support and communication package to employees as well as a significant NI contribution saving for the employer.
Those who are in expensive plans where their current advisers have been taking large, up-front commissions have the most to gain from talking to our specialists. Many group personal pension and stakeholder plans started since 2001 will fall into this category.
Now is the time to ask us to benchmark your current group arrangements against the market so that you can understand the pricing of the plans and, with our help, negotiate effectively. As a part of this service, our specialist employee benefits consultants can look at alternative structures, products, communication and pricing to ensure that the arrangements are fit for purpose and that they remain competitive as we head towards auto-enrolment.
At the same time as we analyse your pension plans, we can advise on wider cost reduction strategies such as salary exchange (potentially saving a significant amount of employer NIC) and look at other ways to reduce the cost of your insured benefits (such as death in service and income protection).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.