Stott (pictured), who advises IFAs on regulatory issues, says that the Retail Distribution Review (RDR) legislation which comes into force in January is a massive opportunity for investors to cut costs and improve the quality of service they receive. RDR will legally require advisers to clearly explain how much of their clients' fees they keep for themselves and how much they give to the fund provider. Stott thinks investors should take this chance to make advisers justify their share.
"You should ask yourself what you are getting from your adviser, how you can attribute value to it and whether you are prepared to pay for it," he said.
Advisers will no longer be able to offer products on a commission basis, whereby they are paid by the fund provider for selling their portfolios on to clients.
This means that the cost of buying funds – the total expense ratio (TER) – will likely be reduced, but advisers will need to find alternative ways to cover their costs – namely, by charging a fee for their advice.
Advisers will also have to inform clients what commission they are taking on funds sold before the new regulation comes into force, and Stott thinks this will put pressure on them to demonstrate their true value.
"If advisers are going to ask £500 for their services annually, it is going to be hard to get that if they’re only seeing their clients once a year," he said.
Advisers will be looking to retain as many of their clients as possible following the regulatory changes, meaning that now is a good time for investors to visit their adviser and have them explain how their charges work and what exactly they are providing.
Following the introduction of the legislation, private investors will be left with three key options for gaining advice.
Advisers will have to register as "independent" or "restricted", providing investors with their first two options.
Independent advisers will be classed as those who can prove they are selecting from the entire range of retail products.
Restricted advisers will be choosing from a smaller pool of products that they deem to be appropriate for the profile of clients they will serve.
At first glance it seems that investors would naturally want to go for an unrestricted, independent adviser, but Stott explains that this is not necessarily the case.
"It might be that in their research the advisers have discovered they can provide the range of outcomes they want with a narrow range of products."
"They may have decided they can cut out all the costs of research into the entire universe of products, which will allow them to reduce the costs for clients."
"I think there will be relatively few independent advisers and no large independent ones at all, largely because of the cost."
The pressure will be on advisers to keep their clients by communicating clearly their services, meaning investors should take the time to research what is available and at what cost.
Stott continued: "If you do not know what they do, you have no chance, so as a client the challenge you have is that you only know what you know – you need to inform yourself."
The third option available to investors is to carry out all their research themselves.
In the run-up to the regulatory deadline of 1 January, a plethora of educational resources targeted at the private investor are being produced, making fund information more readily available to investors who are not looking to use an adviser.
This route is likely to appeal to those who object to paying for advice or those who think they can educate themselves enough to do as well as the professionals.
This will mean, of course, doing without the on-going service provided by advisers of monitoring a portfolio, and will require taking on a continuous commitment that many may not want, Stott warned.