Interactive Investor

Warning over mis-selling post-RDR

26th April 2012 15:47

Ruth Emery from interactive investor

A potential mis-selling scandal where financial advisers recommend the cheapest, rather than the most suitable, investment fund to their client so they can add large advice fees on top has been highlighted by a wealth manager.

From 2013, financial advisers will have to charge fees, rather than take commission, for advice they give on investment products, as part of regulation changes known as the Retail Distribution Review (RDR). This has led to the launch of 'clean fee' Z share classes of funds, so that advisers can more easily add their own fee on top.

For example, Schroders unveiled a new income fund of funds this week, which has a 0.625% annual management charge on its Z share class. Its A share class charges 1.25%.

But Gina Miller, partner at wealth management firm SCM Private, argued that as there is no guidance on how much advisers should be charging from next year, advisers will simply choose the cheapest products so it will be easier to add on their advice fees without making the total cost to the consumer look excessive. "Post-RDR advisers will just sell the cheapest products," Miller stated.

She claimed that fund charges may increase next year due to this practice.

A spokeswoman for the Financial Services Authority (FSA) confirmed to Money Observer that the watchdog will not be giving guidance on acceptable ranges of fees that financial advisers can charge in the post-RDR world, nor will it set any caps on fees.

Martin Bamford, managing director of independent financial advice firm Informed Choice, agreed with Miller that there is a risk some advisers will opt for the cheapest funds "in order to present a reasonable overall cost once their fees have been added on top".

He added: "We have seen this to some extent with passive funds already, with some advisers doubling their charge from 0.5 to 1% per annum at the same time as moving to entirely passive portfolios. It's important that an investor gets value for money, so if ongoing fees are being increased then ongoing service levels should be increased as well. Many of the passive advocates with a 1% per annum fee have included the cost of financial planning or life planning within the fee, so if the investor wants and needs this it can represent good value."

SCM Private is currently running a campaign to make all fund charges - such as performance fees, dealing costs and platform costs - more transparent to investors. The True & Fair campaign has so far attracted 324 supporters.

Nick Blake, head of retail at Vanguard, said the campaign is fantastic, "as long as the investor can do something with it". He commented: "Intent is fantastic, but it's got to be the right data [that is given to investors]. There's a risk that it will bombard people with information [they don't need]."