RDR and the Death of Free Financial Advice in the UK

January 1, 2013 marked the death of free financial advice in the U.K. The Retail Distribution Review (“RDR” for short), went into full effect on that date. The RDR is a set of regulations put into place by the Financial Conduct Authority. The implementation of the RDR marked an excellent day in history for Britain as it created a better financial system for the country.

The RDR sets out three main objectives. Objective One states that the client is to be offered a transparent and fair charging system for financial advice. Objective Two states that the adviser must be clear about what services are being rendered and paid for by the client. Finally, Objective Three states the client must receive advice from highly respected professionals.

The first objective, a transparent and fair charging system from financial advisers, is a foundational shift in the intrinsic nature of financial advice in Britain. To set the record straight, there was never any such thing as free financial advice. Prior to January 1, 2013, most Britons thought there was free advice because the advisers, banks and stockbrokers have been paid by commissions taken from the product provider, not directly from the client. Britons have always paid for financial advice, now they must be told how much they pay for it, up front.

The second objective, establishing rules of clear reporting to the client, gives the client the details he or she needs to make informed financial decisions. The past has been riddled with less than reputable agents selling products that the client did not need and did not explain the product to the client. RDR puts an end to the financial product sellers pretending to be actual financial advisers. Now, when a client seeks financial advice from an Independent Financial Adviser in the UK, they can rest assured that they are paying for quality advice that they need and will understand instead of risking their wealth on a fly by night financial product with little or no benefit to them.

An integral part to the second objective is the newly required description of advice services. From 1 January 2013, all advisers must identify themselves as either independent or restricted. An independent adviser must consider all retail investment products, including unstructured products or no product, to provide their clients with the best advice from the entire range of investment options. A restricted adviser is one who restricts or limits their advice to a specific provider, provider set or product range. The independent or restricted nomenclature allows the client to better understand what type of advice they would be receiving from a specific adviser.

The third and final objective, which states the client must receive advice from highly respected professionals, sets up a certification system and clarifies who can give financial advice to clients. After January 1, 2013, any person giving financial advice to the British public must possess a Level 4 Diploma from a regulated and approved organisation such as the Chartered Insurance Institute or the Institute of Financial Services.

In conclusion, the RDR is an excellent step in restoring trust in the financial services industry. There was never any such thing as free financial advice. Potentially, the public could have been paying hidden costs and fees, in some cases without their knowledge. In most cases, the financial advice given was simply, “you need this specific investment product,” regardless of whether it was right advice or not in your best interests. With the introduction of RDR, those so-called advisers are gone.

Now, when you seek financial advice, you can only obtain it from highly trained financial advisers, whose only profession is to provide real financial advice. Real financial advice counsels you on whether you even need an investment product in the first place and if you do, instructs you fully on the risks and consequences of an investment product based upon your own attitude toward risk. The best financial advisers are independent lifestyle financial planners who determine your lifestyle financial goals before they develop a plan that includes lifelong strategies that may or may not include investment products to achieve those goals. All of this was possible through the introduction of the Retail Distribution Review.