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.
