Should we be wary of cheap financial advice?

robo human

Robert Reid is a very professional IFA and  someone I like a lot. He represents IFAs and stands up for their interests in Money Marketing. His latest article argues that “cheap advice” especially cheap advice on pension transfers, is wrong.

Those firms offering bargain-basement services cannot be delivering a report that is all that comprehensive

In case you are wondering what “cheap” looks like – it’s £500- £1,000. Robert charges more

On average, we charge between £2,500 and £3,000 for the advice

I know of one case where a friend paid £10.000 for a recommendation to transfer his pension from a DB plan to a personal pension. My friend’s an actuary, he knew the answer, he just had to have the certificate from a Regulated Adviser.

So why these huge fees for a simple go/no-go recommendation?

The answer lies with the Professional Indemnity Insurers who stand behind the advice and are charging premiums based on the risk to them. A £1,000,000 CETV may be ten times more risky than a £100,000 CETV. Which is the justification for charging the fee as a percentage of the amount transferred.

There is something wrong here. There is a breakdown of trust between parties, between the insurers, the advisers and the financial ombudsman who presides over claims.

Robert is right to criticise loss-leading advisers who are effectively working on a no-win no fee basis, banking on making their money from funds under advice. This is no way to carry on and I am with him all the way if that is what is going on with cheap advisers.

But what if an adviser created a process that was neither labour intensive or risky? The basis of robo-advice, is that if the robot’s algorithm is fool-proof , all that can go wrong is the mismanagement of data in or out.

If i was an insurer, my biggest worry in a process-driven recommendation like a transfer value recommendation, would be the amount of human intervention that might get into the way of the robot.

As with transfer advice, so with actuarial advice.

Actuarial firms like mine, have understood for some time, that much of what we do is simply a process that can be defined and coded for a computer to do. The cost of the program tend to zero and the risk of the algorithm going wrong is considerably lower than the risk of a series of manual calculations.

Robert sounds – to me – very much like some of the actuaries i knew ten years ago , who did not embrace the new technologies and are now retired actuaries.

The FCA’s project innovate, with its sandpit – allows advisers to test ideas such as robo-transfer recommendations ,  with the regulator. If the FCA are comfortable with a robo-process, I suspect so will the insurer.

My advice to Robert (and to those who are commenting on his post) is to start thinking seriously about automating their pension transfer process. For the costs of financial advice tend to zero , when you get in bed with a robot.

You can read Robert’s article in Money Marketing here;

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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5 Responses to Should we be wary of cheap financial advice?

  1. Brian Gannon says:

    Absolute rubbish Henry. Do actuaries costs tend to zero? No they don’t.

  2. henry tapper says:

    They do with the Pension PlayPen! An actuarial certificate and a full report on your options when choosing a workplace pension costs less than £200!

    A lot of what we do is a lot cheaper than you think- when we harness technology!

  3. henry tapper says:

    Which is why Pension PlayPen is used by Sage and other leading payroll providers to give advice to thousands of employers!

    • Brian Gannon says:

      equating the tick box guidance given to employers choosing an appropriate AE scheme to the complexity of a DB member potentially transferring out of guaranteed benefits is not really comparing apples with apples or even with pears, its like comparing apples with microwave ovens. Irrelevant.

      If it were simply a case of robots advising on final salary transfers then it would be allowed. The advice given is holistic, takes into account lots of factors which have nothing at all to do with the critical yield and value of the CETV, and covers non pension related assets and plans as well as the DB scheme comparison with money purchase benefits.

      Please don’t try and equate the simplistic pension play pen tick box robot solution with that required to give good pension advice to individuals. Actuaries are just not qualified to give financial advice partly because they come out with rubbish like this, assuming that everyone is a robot and that everything is soluble with mathematics. They have failed miserably to advise employers on DB scheme investment, focussing trustees on LDI and not considering the long term impact of LDI on future accrual and costs of paying for this. You are a brilliant blogger, have so much common sense ideas and solutions, but not on this occasion

  4. John Mather says:

    Quote from G20 meeting

    Mark Carney, who is also chairman of the Financial Stability Board that makes recommendations to G20 nations, said that the increase in robot advice could increase “herding” risks and make the system more interconnected and complex

    Bundesbank president Jens Weidmann, who is also involved in the FSB, echoed the views of his Bank of England counterpart, saying that while enhancements in financial technology could bring banking services to more people, they could also “exacerbate financial volatility”.

    Both Mr Carney and the Bundesbank president warned that there were risks emanating from the use of so-called robo-advice, where algorithms are used to manage risk.

    The Bank of England governor said this could lead to excess volatility from “herding”, particularly if the underlying algorithms proved overly sensitive to price movements or all worked a similar way.

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