IWROTE in a previous article about the implementation of the requirements of the Financial Services Authority’s Retail Distribution Review which applies to investments and becomes effective from January 1.

Among the changes being introduced are the raising of the minimum standard of technical knowledge and competence among those offering financial advice, plus greater transparency with regard to the charges levied when an investment product is taken out.

Typically, the charges will be for advice and arrangement of an investment, the investment product provider’s charge and, possibly, a third party administrator’s charge. Up to now the advisor charge has been met by payment of commission determined and paid by the product provider and has been included in the product provider’s charges.

From January 1, the advisor charge must be agreed between the client and the advisor and commission will no longer be allowed.

One of the consequences of this will be a reduction in product providers’ initial and on-going charges, albeit that this may or may not see a reduction in the overall cost of investing when the separate advisor charge is taken into account.

Investment product providers will continue to publish their initial and annual management charges and their Total Expense Ratio.

This latter term is something of a misnomer as not only does it not include total expenses but it is also not a ratio. It is defined as the ratio of total operating costs to average net assets and includes fund management fees, administration costs, audit fees and legal costs.

However, it excludes transaction costs, interest on borrowings, entry and exit costs and ‘soft’ commissions.

These additional costs tend to be higher for actively managed funds because their managers are constantly trying to beat the market by engaging in frequent trading with its attendant dealing costs.

It is, perhaps, no surprise that many advisors are now directing clients towards passively-managed funds which tend to have significantly lower portfolio turnover and, therefore, lower costs, reduced drag on performance and the prospect of a better return to the investor in the long term.

Recent research provided by fund management group Vanguard has shown that 77 per cent of active UK equity fund managers and 84 per cent of active UK Gilt fund managers underperformed their benchmark over the past five years.

There is a clear inference that the probability of receiving the market rate of return is to invest in passively managed index-tracker style funds.

The new year will bring enormous changes to the investment markets and investment advice profession.

It is to be hoped that they will lead to a more open basis for client and advisor dealings and to an improved investment experience for investors.

However, it remains to be seen whether, with many of the banks withdrawing from providing financial advice as a result of regulatory costs and burdens, there will be the undesirable consequence of smaller investors who may find themselves excluded from advice due to advisory firms needing to concentrate on their higher net worth clients.