What the new IFA rules mean for you

The changes brought by the Retail Distribution Review have finally come into effect. Merryn Somerset Webb explains what that means for your money.

Finally it's here. The Retail Distribution Review (RDR). We've been campaigning for it for years and giving you the details in the magazine for months. But the change has actually come. From now on, independent financial advisers (IFAs) will no longer be paid for giving you advice in the form of commissions paid by the providers of the products they advise you to buy. Instead, you will pay an agreed fee direct to your IFA.

The result? Commission bias the risk that IFAs suggest you buy products that pay them high commission, rather than products that suit you is going, and so, I suspect, are a lot of the worst financial products.

Let's not forget how the cycle of commission has worked: in the past, the more money a provider has been able to make from a product, the more commission he has been able to pay, and so the more likely an IFA has been to recommend it. The worst products have carried the biggest incentives, which is something on which you can blame almost every scandal in the financial services market over the last couple of decades.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The other big (and good) change is that your IFA will be better qualified: he has had to take exams equivalent to the first year of a degree course. You might be horrified to hear he wasn't that qualified before, but that, I am afraid, has been the way of it. And at least he is now (if he isn't or has found that the exams are beyond him he isn't supposed to be working anymore, so you might want to check).

The RDR isn't perfect. The platforms on which most MoneyWeek readers invest can still take trail commissions (a commission for every year in which you hold a fund you buy through them) and probably will be able to for another year.

In some cases, that will make them more expensive than going to an IFA and paying him to buy the funds for you www.rplan.co.uk has an excellent calculator so you can check. Commission will still be payable on life insurance, income protection and critical illness insurance (we'll need to keep campaigning on these).

At the same time, it is possible that IFAs will lead an undignified race to the bottom on price using only the cheap exchange-traded funds, deposit accounts and investment trusts they have ignored for the last 20 years, and avoiding anything actively run instead. But these are teething problems.

Overall, the RDR is good news. People will no longer make the mistake of thinking that financial advice is free (a Financial Services Authority survey in December showed that 33% still do). And we now have an industry staffed by people who are reasonably educated in their subject and no longer able to invite bribery. Hooray.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.