Master Menace
Which came first, the need or the greed?
Old Mutual Wealth (a company that owns one of Britain’s largest financial advice networks and is build a tied network) has commissioned a survey that tells us 90% of those between 30 and 45 have not made financial plans for their retirement.
This is not the same as saying that they are not saving for their retirement (auto-enrolment is seeing to that), the statement is that these people are not planning what to do to have a financially secure later life.
A lot of the answer is in the framing of the question. I know a lot of people in this age bracket who think about the future with alarm and have little trust that their meagre pension planning will see them through. I know a lot of people who have parked pensions having joined a workplace pension , in the hope that having a pension is the same as being sorted in retirement.
If I am to agree with Paul Feeney, CEO of Old Mutual who made the early morning start for us to Wake up to Money – and here his views , then Generation X are heading for the same financial difficulties as are befalling defined benefit schemes and those buying annuities today.
The need for financial advice
For most people, the need for financial advice about saving for retirement is pretty well zero. People need a few rules of thumb (which I will not rehearse) and should save what they can afford when they can afford it into high quality low-cost workplace pensions.
They do not need investment advice, they need a good default.
They do not need tax advice – though they should be encouraged by the tax advantages they get from saving.
They do not need a dashboard making spurious projections around which they make spurious plans.
Most people do not need financial advice and should not be paying for it. The fact that there are only 22,000 financial advisers against 220,000 lawyers ( a number presented by Paul Feeney this morning, tells me we need ten times more lawyers.
For most people, work is where they get their savings and their protection and increasingly it will be the internet from which most people will buy the extra financial products they use to help them and their family achieve financial goals.
I was fortunate enough to hear Holly Mackay of Boring Money talk about the tribes of savers , her firm has segmented, those in this age group regarded Money Saving Expert as authoritative, they do not want to pay someone for something they can source from their phone.
The greed of financial advisers
The idea of financial planning is all but dead in the UK. The concept of a regular annual health check from a financial adviser is simply not something that most people in Generation X are considering.
Since the Retail Distribution Review made the sale of personal pensions and incremental contributions non-remunerative to advisers, advisers have stopped selling savings and moved on to managing the accumulated wealth.
The concept of pensions “wealth”, as defined by managers is ludicrous. Someone is considered pensions “wealthy” for having £100,000 in their pension pot. This would buy a proper annuity of around £3,000pa and might generate a non-guaranteed drawdown of £4,000 but these income levels could not be said to make someone “wealthy”.
In practice people of a certain age (typically those in their fifties and sixties) are being told that we need wealth management when our retirement wealth is so pitiful as to make us pension paupers.
The “wealth” in our savings is the 2.5% pa + that is being skimmed off these people’s savings by fund managers (and their cronies, platform managers, discretionary fund managers and by financial advisers to fund the lifestyles of the few.
The Menace
We learned two things from the 2013 OFT review of pensions. The first is that pensions are complicated and the second is that people are bad purchasers both of pension and of pension advice.
The recommendations of the OFT were for simpler products , that did not need advice and for better fiduciaries (IGCs and Trustees) to make sure those products met the needs of people unable to afford advice.
The menace of Old Mutual’s survey and its conclusion is that ordinary people will be poor in retirement unless they pay for financial advice. Every bit of evidence from the RDR, the OFT and from the success of Auto-Enrolment suggests that financial advisers are a menace to the 90% of people who are just getting on with it.
The Master
There are many in Government and in the Government regulator- the FCA – who believe that we all need access to financial advice throughout our lives. The Financial Advice Market Review seems to be predicated on this belief.
But His Master’s Voice went bust – and this received idea is bust as well.
Most people in their thirties and fourties are too busy bringing up families, finding a way to pay their household bills, find mortgage finance or struggle with renting – to find discretionary money to spend on pensions.
Instead they are being nudged into pension contributions in a way that avoids them having to make complicated financial advisory decisions. Payroll dictates their tax, their NI and their pension contribution (under auto-enrolment).
The masterful way in which enrolment is being introduced has meant that less than one person in ten has opted out. The very same 90% who are not thinking about retirement are the 90% who are busy saving for it!
Why we only have 22,000 advisers.
While most of us need a lawyer or a doctor from time to time, most of us could do without ever meeting a financial adviser. That assumes of course that when we are “wealthy” enough to reduce or stop our working, we have a financial escape route.
For most people , that will be when the state pension kicks in. For most people that will require at least £4,000 pa of additional income (assuming that the basic floor of income in retirement is somewhere near the nil-rate tax threshold).
But for those relying on pension savings of £100-200k, the prospect of losing around 2.5% growth to the managers itemised above is not a happy one. In the current financial environment , the cost of drawdown from a wealth platform is between 40 and 60% of the prospective growth on the fund. This is way beyond the means of those relying on this “wealth” and the consequences of this seepage of value will be financial ruin.
This blog has said this many times, but- in the light of Paul Feeney’s comments this morning – I will say it again. What we need is not just the non-advised good value low-cost products for workplace saving but the equivalent to spend our savings.
We only have 22,000 advisers because there are only a very small number of us with financial situations complicated enough to merit financial advice. The concept of mass-market financial advice is dead – if it ever lived.
Collaboration not competition
I hosted a lunchtime session at the LGIM DC Conference yesterday and heard people outside the pensions industry talk of collaboration and the value it brought the consumer.
The view was that competition in financial services led to the proliferation of choice and the need for advice, but this was not seen to benefit ordinary people. Ordinary people were benefiting from the collective workplace pensions and from the state pension.
The truth of the Old Mutual survey is that 90% of us are in the same boat, we save all our working lives and live off our savings when we stop. 90% of us don’t want it to be much more difficult than that. We want to know what to do and do it.
So my message to Paul (who I know and like) is to stop menacing us with the need for advice and spend time instead building us products that can help us spend our workplace savings.
If we focus on the simple truths in this blog we will stop worrying that 90% of us aren’t worrying about retirement and get on with building the conditions to justify their lack of concern!