Is this what we call regulated advice?
Yesterday I told a cautionary tale about a friend who came close to sacrificing 105% of 10 years projected growth on his pension pot in advice and management fees. He asked the question “how can this be” as the long report he had been given was produced to a high standing and had risk warnings on every page.
I remember one adviser remarking that his charges were reassuringly expensive, presumably the adviser behind the 3.7% TER felt the same. With inflation at 0.5% pa , any investment return over 3.5% pa is ambitious, if the ambitious return of 3.5% was achieved on my friend’s portfolio, he would be left- after charges with an actual return of -0.2% nominal , -o.7% real each year for ten years.
In 1980, inflation peaked at 22%pa, in those days, projecting fund returns of 13% was reasonable, you needed double digit growth on your investments to simply keep up with the cost of living. In those days, you might have been able to “lose” 3.7% pa of the investment return in charges.
It is quite extraordinary, that in the intervening 35 years, the costs of managing money have plummeted, it is now possible to buy an equity fund as a retail customer and pay no more than 0.1% pa (as was offered to my friend’s wife).
When my friend saw that number, the scales dropped from his eyes. He realised that the rest of the apparatus that he was supposed to be paying 37 times as much for, was simply illusory.
What happened to “Financial empowerment?”
Nowhere has personal empowerment been less apparent than in the delivery of financial services to the retail customer.
This is largely because of the way financial advice has to be delivered.
Alan Higham tells the story or his late mother’s attempt to buy an annuity. With the help of her son, she tried to get direct quotes from insurers net of advisory fees. She was denied net quotes, she went to non regulated advisers and was charged commission as if she was being paid advice, in the end she ended up paying for advice from a regulated advisor even though her son who was helping her was a qualified actuary.
My own experience was much the same. I am no longer a regulated adviser but I am capable of managing my own affairs. When I tried to aggregate my eight DC pensions into a single pot, I was forever arguing with insurance companies who insisted I took advice.
The trouble to me and the insurers of having to circumvent the rules in place to ensure that advisers were involved outstripped any other part of the process.
Pension Freedoms- anything but free!
Which brings me on to the Pension Freedoms that we hope to enjoy from April 2015. Writing in the Guardian last weekend, Patrick Collinson is sceptical that we will enjoy them. He claims that Pension Freedom is an expensive myth.
His argument is that the freedoms promised are illusory as they can only be accessed through layers of intermediation that make them anything but free.
The wholesale cost of managing a pension in drawdown , including fund management fees and all administration is less than 0.5%, the whole edifice of the financial services industry is sustained on the myth that the charging structures established in the 1980s – are still relevant today.
I am not in favour of introducing caps to drive the cost of drawdown down. I am in favour of a market where prices are competitive and value emerges organically. Such markets are sustainable.
The current market is intent on keeping the bar high on costs and charges. It is doing so by insisting that ordinary consumers cannot manage the difficult equations on the tough questions without advice. By tough questions, I mean “how long can I live?”, what “real return can I expect on my money?” , “what risks are there that my money will run out?”.
These questions can be answered with the help of guidance and guidance can be provided with the help of technology. But to use technology to answer these questions, would break the stranglehold that advisers have on the financial decision making of Middle Britain.
A closed shop
Financial advisors are not unionised, they do not have to be , they are protected by their suppliers, the insurance companies and fund managers. They have a closed shop as effective as the printers in the 1970s.
And like the union rights that grew up after the war, the closed shop is protected by law. In particular by the various financial services acts which have perversely done more to protect the financial adviser than the consumer.
To the point that a compliant financial adviser can issue a report recommending it to be in the interests of a client to invest in a strategy that is projected to lose 0.2% pa each year for the next ten years.
It is precisely this kind of lunacy that brought down the closed shops of the 70s and similar change is needed today. Leadership is needed if we are to be able to make the most of these pension freedoms and the closed shop won’t be open without a struggle.
At present, many of those who should be taking a lead are waiting for others, worried about delivering directly to the consumer, of non advised sales and of pricing against existing distribution, The delivery of the technology which is ready to be used, is being held back for fear of Regulation and the end result is that we are not moving forward.
Release us from the bondage of such advice
I very much hope that over the next six months, those who have the power to change things, recognise that change is needed and release those who want to exercise their freedoms from the bondage of advice.
Henry, you make some excellent points. However, I think that you are highlighting the issue as being potentially caused by advisers, whereas in fact those of us in the adviser community who want to offer advice cost effectively simply cannot do so unless we wish to do so on a non-profit making basis. It is a little bit rich of you to criticise advisers for their charges when you are an actuary. If I were to follow your line of logic I could say (disingenuously and tongue in cheek of course) that all actuaries do is charge exceptionally high fees (certainly much higher than those taken by financial advisers) for adding stuff up and doing present value and discounting calculations that a computer could do. They hide their charges and the work they have or haven’t done behind massive project fees and long-winded jargon-rich reports. Yes they keep timesheets that show the number of hours work done, but in reality isn’t it just a bit of mathematical modelling with an understanding of the assumptions involved in looking at long-term assets and liabilities? Of course, in real life actuarial consulting requires a lot of skills and specialist knowledge in interpreting this work and in explaining it and advising clients as to the repercussions of future strategies (usually companies rather than individuals). And companies pay for that expertise and all the soft skills rather than the “maths”. Similarly, advisers are not simply peddling products, they are spending time knowing their client fully so that they can then provide valuable personalised financial advice on an on-going basis. This has to be done within a frankly ridiculous regulatory framework which requires us to provide all sorts of meaningless unhelpful facts and figures. As you so expertly pointed out, this DOES NOT protect the customer in any way at all. It appears the adviser has produced a water tight report which would protect him fully against any customer complaint, so in effect he is operating within the regulations and has offered complaint advice. It is this that is ridiculous. The adviser (or his organisation) has had to spend hours and hours producing and researching this document, so he has to charge fees which enable his organisation to recoup this time and expense, and also build in a profit. The adviser expenses include substantial costs of regulation including funding the FCA, which cannot be controlled by Parliament, only questioned by them. We have to pay towards the guidance guarantee which will be delivered by the Citizens Advice Bureau and The Pensions Advisory Service, we have to pay for the Money Advice Service, which basically produces a public service website and debt counselling advice service at our expense. We have to pay levies for the cost of failures such as Arch Cru even though most of us would not go near such an investment.
So all of these costs and regulatory requirements mean that the client ends up with a highly expensive service. However, the advice is something which must be paid for. If you are saying clients should be able to take advice only if they want to then I pretty much agree with you. However, in many instances the decisions taken by clients using technology without advice will not be good ones because most clients simply do not know what they do not know. You are very knowledgeable about investment issues so maybe cannot see through the eyes of the common man? I think the points you make about excessive charges are all entirely valid but thoroughly disagree with your analysis as to why these costs exist. So don’t criticise the adviser for having to charge such high adviser fees when most of that fee goes on costs.
Actuaries are the biggest closed shop of all in the wider advice arena, and with the demise of final salary schemes they are having to find ways to justify their existence. However, they can continue to offer valuable advice to clients. So too can good financial advisers. I suggest you should protect clients from high charges by using your influence to inject some common sense into a regulatory system which is still living in the 1980s.
Henry, I somewhat agree with Brian and I’m afraid think this is not up to your usual high standard of insightfulness. You are making rather generalist statements about Financial Services. Contrary to what you believe the “recommendations made” to your friend can and should be challenged. I have in the past seen similar recommendations reflecting both lack of knowledge and a desire to earn large fees – I have indeed challenged these with the advisory firms where I thought it appropriate. But such poor quality advice is not solely the remit of advisers – how many with profits funds, and final salary schemes have suffered from poor actuarial advice. I cannot recall an actuary being brought to task. Similarly accountants and solicitors. I can assure you that the many very good advisers seek to improve clients circumstances and receive a fair reward for doing so. The primary aim of a pension switching recommendation is to improve the clients situation and of course cost is paramount to this – any adviser that fails to do this should be complained about! As for our fees – we do keep these to a reasonable level but we like you are in business to make a profit – otherwise we do our clients a disservice by not being there when they need us. Our goals are always in tandem with our clients and that’s why we have a long standing relationship with them and a very stable and settled company that aims to be here for many years . Your notion that the various Financial Services Acts have done very little to protect the consumer is I am afraid largely true – BUT I’m not sure how advisers have benefitted so much. A large part of our necessary costs is to cover regulation and insurances – which clearly do not work. Do you not find it intriguing that regulators have never prescribed what and how you should make recommendations. That products have no rubber stamp approval, that there is no cost guideline, or indeed maximum fee, that scandal after scandal keeps happening with merely a wrist slap and fine for the large repeat offenders.
At a time when more people will need good advice the regulations and likely liabilities would I’m afraid prohibit most good advisers from talking to customers about their pensions – its simply not worth the considerable time and risk for us. We aim for clients not customers – it annoys me intensely that regulators refer constantly to customers not clients of advisory firms – we look to build long term relationships and to work hard for our clients.
I drivelling on now so will come to an end. As I said this article was not your usual high standard but I look forward as always to your next.
Two interesting and useful pieces, thanks both.
I’d like to suggest something which will probably be rejected – transparency.
I spoke some years ago at a conference of the, then new, American Association of Legal Marketing (I have no idea why they invited me as they weren’t really into advice technology).
I was though struck by one speaker (well two if you count the Microsoft speaker who used psychometric testing to select borderline paranoics as staff, so that they would wake up in the night worrying about sales figures). The one I liked was an attorney who had ‘unbundled’ his services. Clients could buy the bits they wanted and do the rest themselves. They could do the research and pay him to do the court piece, they could rent his law library, use him for specific bits of consultancy; they could choose the jigsaw pieces they needed. What that meant though was that he couldn’t hide the costs of one type of work behind another. The clients got to see the comparative costs of each of his skills and resources.
If advisors did that, it would let clients pick the bits of advice that they needed and not the bits that they were competent or informed about themselves. It would also let people like me see where there were opportunities to use technology to support or replace some of those functions for use by clients or intermediaries and whether the cost / benefits worked for them.
My suspicion is that transparency, for some advisers and, maybe, for some functions, might show how much of the current fabric is Emperor’s New Clothes.
Hi Gareth – Our clients do have the opportunity to engage with us on a time costed basis, but the nature of regulated advice generally requires us to provide the full holistic service when the outcome of our advice leads to a recommendation to transfer a pension into an existing regulated product or to take out a new regulated product. In instances where advice is not relating to a change of or creation of a new product recommendation then our clients are able to pay for whatever aspects of our service they desire on a time costed basis or at an agreed overall project fee.
Henry – Brian and John (above) have given you some thoughtful and considered responses, which you might like to comment on.
There is a danger you are significantly contributing to the all-advisers-are-charlatans viewpoint (a subset of the everyone-in-finance-is-responsible-for-the-dire-state-the-country’s-in-today mindset). I would like to think no advisor in our company/network would never get a recommendation like the one you refer to past Compliance. But, obviously, there is some bad (and bad-value) advice. And a real lot of great stuff, too, which isn’t always making people hugely rich.
I would suggest that Hargreaves Lansdown spotted the need you have identified a while back and, while I think I personally could put something together that would be better than everyone individually trying to ‘do (unadvised) drawdown because the Cancellor said I could’, that might not be easy to do from within an otherwise advised environment.
Finally, I would request you avoid salacious teaser titles in future, since people might read your point of view for the wrong reasons. (‘The Bondage of Advice’, indeed.)
Henry, I agree with Brian & John.
Can I comment in favour of your argument, but point the accusatory finger elsewhere. “The best is the enemy of the good” was early career counsel for me. As a customer I like to cherry pick my advice and the regulator makes that exceedingly difficult. Most of the comments above assume a polarity between advised and non advised- as the regulator seems to want to reinforce- but I am very unconvinced that is what many customers want. Gold plated financial advice will always be expensive and it will inevitably erode or destroy the equity risk premium- the best (unaffordable) advice is the enemy of good practical advice- the unintended regulatory consequence is either no advice or non cost effective advice
Fascinating discussion.
There is and will be a need for regulated, qualified advisers.
I like the analogy with bookkeepers and accountants; non-regulated, qualified guidance (free from bondage) should be an option – as should regulated advisers (who do a good job for the right clients).
The public should be able to make an easier choice?
Is that not what Henry is saying?