Paul Lewis helps you find a good financial adviser
In his article “Find a good financial advisor”, Paul Lewis argues that most people do not need a financial advisor at all, and for those who insist on one, there are probably only around 4,500 independent, certified advisers that are worth finding.
The best part of half a million people reaching the age of pension consent (55) this year. The proportion of the population in the “drawdown zone” is in excess of 10m and it will grow as our indigenous nation gets older.
Paul is simply pointing out a market dynamic, if supply is there to meet demand, then the estimated demand for advice is either very low – or there is a massive under-supply.
Advice for all – reduced pensions all round?
The Government has taken a different view. Having given us the freedom to do what we like with our pension pot, they now feel we should be taking advice on how to do it and that it is a worthwhile use of taxpayer’s money to subsidise that advice with tax relief.
The logic is that of the madhouse as is the maths. Here is a worked example.
John has a pension pot of £40,000 with a guaranteed minimum pension of £8,000 per annum.
John takes advice using the Pensions Advice Allowance, also reducing the pension pot to £39,500.
John retires and begins receiving his guaranteed minimum income of £8,000 per year, just as he would have done if he had not used the Pensions Advice Allowance.
This means that the actual value of John’s pension has not decreased.
The FCA rules allow firms to reduce part of the client’s rights under the retail investment product to pay the adviser charge. This means that there is, in principle, no FCA barrier to firms offering the allowance for products with guaranteed features.
Essentially, a firm could pay the adviser £500, as long as the firm is able to reduce the underlying value of the individual’s future benefits accordingly. However, it is administratively difficult to determine what an appropriate reduction to the client’s benefits in exchange for the £500 would be.
The first question is why would John want to pay anyone £500 to be advised he will be getting £8,000 a year in benefit.
The second question is how anyone -even under the most extraordinary benign economic conditions can guarantee £8,000 a year from a £40,000 pot.
The third question is why it is administratively easy to reduce a pot of £40,000 by 1/80th but not a pension of £8,000 a year by 1/80th.
The example is so specious – it calls into question what the purpose of this consultation is.
An obsession with financial empowerment
Of the 40m of us adults fit to drive a car, the vast majority of us hold a licence suggesting we are fit and proper to do so. Only a small number of us understands how a car works.
Around the same proportion of those in retirement know how their pension works.
We do not need lesson in car mechanics to drive a car and we don’t need a financial advisor to receive a pension. However, were we to make the car complicated enough that it was unsafe to drive without additional driving lessons, it could be argued we need a mechanic to teach us how to drive that particular car.
We are building pension strategies that need pension advisers while we are building cars to be driverless. We are obsessed with employing people to solve problems that should not exist. For most people pensions should be like driverless cars, far from needing advice , they should get us from A to B with zero intervention on our part (or anyone else’s).
Building driverless pensions
Of course people will tell you that you can buy an annuity, as if that was a driverless pension. But buying a guarantee of future financial misery is like investing in a car with a siezed up engine. Yes you will be guaranteed that car will never cause any damage- but that’s because the car can’t get you from A to B.
The point of a driverless car is not that it is driverless, it is that it allows people to get on with their lives while travelling from A to B (and it certainly does not mean hiring a chauffeur).
We can build driverless cars and yes we can build adviser less pensions. Infact most people will get a driverless pension from the state. If John, in the example above , wanted to – he could convert his £40,000 and get a little over £1000 a year in extra pension. or he could look for a higher target (without the guarantees). But to do so he would probably have to pay an adviser the £500 a year that the Government consultation is suggesting is a reasonable price for mid-market financial advice.
The economics of the madhouse suggest that any financial advantage in John taking advice, would be eliminated by the cost of the advice. He would be paying a chauffeur to drive his car – hardly within the pocket of the average working person.
The lunacy of our pension system
The FAMR has got caught up in the fallacious logic that has driven the life insurance industry for decades. The assumption is that there will be advisers so the pension products are built complex. The complex products are built but nobody want to pay for the advice. The products become driverless and crash. The Government then recruits an army of financial chauffeurs to keep us all safe.
Paul Lewis didn’t need a thousand words to sum this up.
and don’t get him started on pension dashboards!