Don’t tell me what to do – give me advice!

In a recent polldaddy poll I asked whether people would pay for advice to get information, find out their options or to be told what to do. 60% of people wanted options , 30% wanted to be told what to do and 10% wanted information. Last time I looked, there were 60 respondents- I’ve kept the poll open and you can add your vote and comments here.

The sample is skewed, people who read blogs are probably more capable of choosing between options and the choice “to be told what to do” sounds a bit harsh. Nevertheless, this result surprised me as I’d have thought that more people would have wanted “the provision of a definitive course of action”.

The question came to mind as we are now only 12 months from the introduction of new rules on how financial advisers charge their customers (as a result of the lengthy Retail Distribution Review).

My firm, First Actuarial , does not give  consumer”financial advice” which we consider to be the “delivery of a definitive course of action” but we do charge our customers to lay out the options available to them so that they can take an informed choice (we call this financial education). This appears to be what in line with what most people in the poll want. Interestingly, we are regulated by the Institute and Faculty of Actuaries and not by the FSA.

At the end of this peice, I’ll try and explain how we consider our advice as strategic and indpendent of implementation (for which we will also charge – though seperately).

Actuaries, who typically take about the same time to qualify as doctors (rather longer than lawyers and accountants), have never had great difficulty charging fees. If asked to justify the fee, the actuary would shrug and say “because I’m worth it” , you get that confidence from the process of passing 15 strenuous actuarial exams, having a decent degree and signing up to a code of ethics which are among the strongest of any profession.

I am not an actuary and have been an IFA much of my career, I still have some difficulty saying “I am worth it”, though less difficulty in my current position than in others , I suspect that some of this self-confidence rubs off on me.

I have a lot of sympathy with advisers who have charged for their work from commissions on the products they sell but – and here’s the thing – I believe that financial advisers should be paid for telling people not to invest in a financial product and should be equally rewarded if a client chooses to do nothing , that being one of the options suggested by the adviser.

I think this  gets to the nub of the matter. Ask yourself the question

“Would I be prepared to pay for advice which suggested I do nothing?”

If you go to the dentist and he tells you that you are doing fine or you get a clean bill of health, you do not feel cheated – you feel relieved. It might hurt to have to pay the dentist’s bill but the point is that you trust the dentist to deliver you the “no action required” option and pay him for his experience and skill.

There are only so many things that can go wrong with a set of teeth and for most of us the default position is that we are not expecting much more than the odd filling. With finance, there are so many areas where improvements can be made, planning for long-term care vies with the natural wish to pass assets to the next generation, we worry about whether to save through ISAs or pension plans and what part of our budget should be devoted to protecting against sudden calamity.

In short,how we dispose of our capital and income involves a complex series of choices. Even where we have a clear strategy, the strategy needs to change with time to adapt to changing circumstances and there are thousands of tactical decisions we could we could take, to take market opportunities for example.

The majority of these decisions we outsource to asset allocaters, stock pickers and the like. We don’t want to know the details of what they are up to, we just want a regular report on their progress (if that).

Differentiating between the strategic decisions (those unique to my circumstances and predilections) and the tactical issues (the must-dos dictated by the regulatory, economic and fiscal climate) is the adviser’s job. Going back to my poll, I would like advice that helps me set the priorities I place on the use of my capital and my income. I would not like advice on how to implement these strategies, I would like a clear-headed recommendation in the same way as I would expect a dentist to take decisions on what kind of filling best suited my teeth.

This is my interpretation of the findings of my little poll. The more urgent question is whether the advisory community to find a way to charge for the strategic stuff without having that charge cross-subsidised by the tactical stuff. At present , commission on the tactical stuff – the products – still accounts for over three-quarters of an IFA’s pay.

Were an IFA to be so confident in his ability to get paid for the strategic stuff, including the option to do nothing, then the skew towards commission paying products would be eliminated and advice really would become independent.

The idea of an adviser whose advice is independently rewarded from the outcome sounds really good, but I’ll end my new-year ramble with this thought. For most of us, confidence in advice is based on our credibility in the adviser’s capacity to make all options happen (directly or indirectly). We look for our consultants – medical, dental or financial to not just lay out our strategic options but to show the aptitude to make our strategies happen. While we may wish to reward strategy independently of implementation, it is the capacity to act – to see through from start to finish, the plan, that inspires us to regard the options as real for us.

As IFAs face the challenges of 2012 and beyond, I wish them well. Many will not be in business this time next year, many will have unworkable business models and will be ruined by the new rules but I suspect that what will emerge from the RDR is a better thought through advisory system with a new model for advisers which will compliment the existing professions in skill and integrity.

Incidentally, if you agree with our way of doing things and would like to work together with us, please look us up (my details are on our website www.firstactuarial.co.uk).

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in corporate governance, customer service, dc pensions, de-risking, pensions, Retail Distribution Review, Retirement and tagged , , , , , , , , , . Bookmark the permalink.

5 Responses to Don’t tell me what to do – give me advice!

  1. Thornton says:

    Another good article Henry, very interesting as I had always thought the majority of clients were looking for clear advice rather than information or laying out the options. As you mention perhaps there is a ‘skew’ because of the type of reader?

    Fortunately there are those of us in the IFA world that have always charged fees with reference to time spent rather than relying on comissions which by their nature are only generated when investments are placed!

  2. Scott says:

    Generally a good article, although the comparison with other professionals such as dentists and doctors is always open to debate.
    For example, are dentists white than whiter (excuse my little pun) as they charge say £30 for a check up but would earn say £100 doing a filling as well – does that not create a conflict of interest. What about cosmetic dentistry? Do you need to spend money on whiter or neater teeth?
    As for your poll, I would say most of my clients want my advice rather than simply the options – your doctor does not say you can do this or that. He makes a diagnosis and then prescribes drugs or a treatment. He generally does not ask ‘what do you want to do?’ or give you a choice of drugs.

    • henry tapper says:

      Thanks Scott

      I agree that the comparisons don’t stand up to too much scrutiny. I think the point with dentistry is that you tend to get some choice at the strategic level but once things are underway , the dentist’s the boss,

      Certainly as a financial consumer, I’m keen to be consulted on the strategy and wouldn’t let an adviser tell me what to do, but I’m happy enough for them to tell me how to do it.

  3. Pingback: Advice in the workplace is 20% cheaper | Henrytapper's Blog

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