At two recent events – (the Corporate Adviser Summit and the Investment Network), Advisors have told me that they choose clients not by “minimum fee” but by “minimum funds”. This sets my alarm bell ringing!
If you want to see just how prevalent this practice is – go to http://www.vouchedfor.co.uk/ and search for advisers near you. I suspect that few will want to advise you if you have less than £100k of wealth.
If I go to a lawyer or an accountant I expect to be presented with a set of time/cost rates. I might get an indicative quote for the work to be done, if I was lucky I might get the job quoted at a fixed price.
So what is the relevance of the funds I have at my disposal? Put another way,
“If I have no funds to manage, can I not get advice?”
What is more, it’s suggested to me that the fees I pay for advice will be based on the funds I have to be managed. Indeed I have been told by several advisers that the cost of any advice I was given will be offset against monies earned from funds I put under advice. The suggestion is that advice continues to be free so long as I put my funds with the adviser.
But I am not going to an adviser to get my funds managed, I am going for advice as to how I should financially organise my retirement.
This involves me thinking about how much I will have to work, how I should plan for extreme old age, what I should be doing about my property, inheritance, the advisability of buying extra state pension and when I should be doing all this.
The question of who and how I should have my DC monies managed may fall out of this conversation, but it is not the conversation I want to pay for.
The impression I get from talking to advisers is that the major decision – the point of me, a bloke nearing 55 wanting to talk about pensions – is to find an alternative to an annuity. The alternative to be promoted will be the Advisor’s proprietary solution which is likely to involve a basis point charge over the assets under management. This is what is now called “vertically integrated advice” which is a posh term for commission.
And so long as this is the primary focus of the Advisor, all other options are likely to be discounted.
So the woman with a reduced entitlement to the new state pension, or the person close to state retirement age may not be recommended the option to buy more pension rights because of this bias. When new non-advised products arrive as part of the DA agenda, they too may get ignored. Even annuities, which may be the most suitable choice, are in danger of getting forgotten such is the allure of “funds under advice”.
The obvious alternative is to ask people what initial fee they are prepared to pay for their advice.
Will people understand?
As stated above, there’s a danger that advice will continue to be advertised as “free” and that advisors will depend for remuneration from a charge on the assets under advice. Unless the nominal amount being taken out of the funds is properly advertised, people will continue to discount the basis point charge and forget that it is every bit as expensive as paying the advisor by cheque. 1% of £100,000 is a thousand pounds. But is not just £1000 in 2015, it is £1000 in 2016 and for as long as the £100,000 remains.
Here there are two further problems, firstly a conflict between the adviser and his client as to the spending of the money –the more spent, the less the adviser earns in future, secondly an inbuilt bias for the advisor to be inattentive in future years. We have ample evidence of how the commission system gamed against the customer. Commission- based advisers were better off letting sleeping customers lie (as they got paid for doing nothing).
The new customers that the Guidance Guarantee will provide may not be sophisticated and may not understand that by entering into a contract where the adviser takes a charge on assets for advice just what this means. This advice is not free and if advisors free-load on advisory assets in future, it will be picked up.
The financial press are watching and the cavalier practices of the past will be quickly exposed. Customers who claim to be fooled into advisory agreements are now well informed on their rights and will have the full-force of the consumerists behind them if they can prove they are not being treated fairly.
Why this matters so much
The guaranteed of guidance on the new pension freedoms, is not a guarantee of advice. Strictly speaking guidance cannot tell you what to do, it can only point you in the right direction and very often that will be in the direction of a regulated “financial adviser”.
Signposting to a financial adviser who turns out to be something else- will not go down well.
MAS are organising the establishment and maintenance of a Directory of Advisors. Let’s hope that the Directory contains advisers who are clear about how they charge and what they are charging for.
If we cannot get clarity on all this, I fear that we will be back in the muddle the Retail Distribution Review was supposed to sort out.