Contractors seeking professional financial advice on pensions and investments have been required to pay fees from 1 January 2013 as part of the Financial Conduct Authority’s (FSA) Retail Distribution Review (RDR). The sweeping changes introduced by the RDR are the FCA’s attempt to improve transparency.
Since 1 January 2013, contractors have paid fees for financial advice on pensions and investments, because their financial adviser is no longer allowed to receive commission.
Also, the RDR has introduced tough new mandatory professional standards for financial advisers that will help improve the quality of pensions and investment advice offered to contractors.
Financial products affected
Not all financial products are affected and contractors should only be expected to pay fees when being advised on regulated pensions and investments. Contractors can still seek advice from a financial adviser on ‘protection gap’ products and on mortgages.
The so called protection gap is used to describe the number of individuals with an inadequate safety net in the event of illness or death. This includes financial products such as income protection, critical illness cover, life insurance, medical insurance and death in service cover. These types of policies are particularly important for contractors because, unlike employees, they have to make their own arrangements for such protection.
Not all investors may need to seek professional advice, and a basic level of financial advice is supplied for free by the Money Advice Service. But by its very nature, such sources of information will cater more for permanent employees than contractors.
However, contractors either need to have relatively straightforward affairs or be very finance-savvy to make their own investment decisions. The danger remains that investors could fail to maximise the return on their pensions and investments or inadvertently take on undue risk by failing to take professional financial advice.
Self-investors often lack the necessary diversification across different asset classes to avoid problems in times of volatile market conditions and this can seriously dent long term returns.
Fee basis – ongoing, fixed, hourly?
Charging mechanisms will vary from adviser to adviser and contractors should confirm from the outset the basis on which they will be charged: One adviser may decide to offer to research and set up a pension on a fixed-fee basis; another might charge by the hour.
The vast majority of contractors work on a time-charged or fixed-fee basis, so the concept of paying in this fashion will be familiar. But, in the same way that they carefully specify their deliverables to their clients, contractors should expect the same from their financial adviser.
Claiming financial advice as a business expense
The advantage that limited company contractors enjoy over employees when paying fees for financial advice is that in some cases the cost can be claimed as a legitimate business expense.
Contractors should assess the relative benefits of each type of adviser and their costs against their own needs before making a final choice.