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.
Unfortunately it’s not quite as simple as that. Whilst I fully agree with the principle of paying for advice based on the time and complexity, there are cashflow and tax considerations that need to be taken into account. If a client wants advice on their pension and are issued with an invoice which they pay for by cheque, then there is a good chance that invoice will be subject to VAT, and it will also have to be paid for out of net income, not gross pension funds. This effectively doubles the cost of advice. That is not a good consumer outcome. It also assumes that the client has sufficient cash to pay the bill, which sometimes they won’t, even though they might have the money in their pension fund. If all financial advisers sought to charge in the same way as accountants and solicitors then it exclude even more people from getting advice.
If the government wants people to have financial advice that is truly independent of products, then they need to make further changes to ensure that paying for financial advice by cheque receives the same tax treatment as having money deducted from your pension fund.
Making fees for financial advice a tax deductible expense would be a good start, and would give fees for financial advice the same tax treatment as most accountancy fees, although I think they should go further and also make it exempt from VAT as well. Another option would be that pension companies would be compelled to pay ad hoc fees from a member’s pension pot for financial advice if the member agreed to it, although that would cause a lot of administrative work for legacy contracts which in the end would result in higher charges to the consumer on new products. One thing is for sure though, as long these disparities exist, then advisers should consider the tax and cash flow position of their client when deciding their charging structures.
Henry, of course you can get advice even without funds under management. Pleas don’t pretend be so niaive. So long as you are prepared to pay the going rate for it. NB. Cheap advice usually turns out to be anything but in the longer term!
In addition to Steve’s comments (esp. re VAT), I’d add that you’ve overlooked the fact that – under the current regulatory regime, created by a UK democratically elected government, ie you & everyone else who voted – the financial jeopardy on the adviser is proportionate to the sum advised on / invested both initially and ongoing. And with no long-stop….that potential liability follows the adviser to the grave.
Therefore, of course, most sensible advisers making investment recommendations charge a fee which is proportionate to the sum under management. To do otherwise could be commercial suicide. Especially as we have seen FOS’s decisions biased towards the consumer.
If the FSCS , FOS & FCA adopted a more grown-up approach and the Nanny State concept was scrapped, with a return to common sense and caveat emptor then advisers would see a subsequent reduction in their costs which they could then pass on to their clients. Happy days!
However, in the current real world this isn’t the case.
I suggest you stop blogging here and lobby your MP.
I think my MP is pretty useless! I agree that we need a more robust approach to advice
As ever you raise ethically correct points. Trouble is regardless of the tax position, and regardless of what is right and what is wrong, most people do not like being invoiced. I agree that it would be better to invoice flat fees for certain types of advice, and that there is no intellectual link between the amount invested and the complexity of advice relating to it. However, Unless our regulators get with the modern world and provide a means of payment for individually calculated fees from the investment product (see Steve and Mark’s comments) then facilitated percentage fees on the amount invested are likely to remain the most prevalent form of advice cost/charge.
Well here it goes, my head I suspect is going to be blown off, but I have worked out a way to offer financial advice to anyone regardless of the size of their wallets. You just have to create a new kind and breed of financial adviser and once you can do that a new model can then be built removing any pre concieved ideas of how an adviser operates today.