If you take my advice

take my advice

If you take my advice, I will most likely end up being sued or prosecuted by the FCA.

For I am not an adviser, I cannot opine on investment matters  with a view to delivering someone a definitive course of action. I can however tip you the winner of next year’s Gold Cup or Grand National, I can recommend you the next property hot-spot and I can offer to show you the cheapest way to get to Port Talbot (split your ticket at Didcot Parkway – using your Network Railcard for the Paddington run in).

All of these examples of financial advice do not constitute investment advice, so if the horse falls, your house gives you negative equity or you get on a train that doesn’t stop at Didcot Parkway- tough luck – I’m not to blame.

I have just read an article on advice by James Riley of KPMG which further complicates matters.. It concludes

In the DB market, we now arguably have a gilt-edged product for the few and no advice for the many. In a DC world, where the average pot size is around £50,000, we can’t allow this to happen.

The relative simplicity of DC advice helps – but in order to deliver widespread support, other options need to be explored. Current contenders are algorithms that can deliver ‘robo advice’ and more general member guidance, which offers more than just a list of options but stops short of a personal recommendation.  Only when we embrace these alternative forms of support to individuals can advice really become the norm.

It is true. Many people (94% of us according to the FCA), do not take regulated financial advice, and the 6% that do, generally do so to move to “the DC world” and away from what is “arguably a gilt-edged product”.

Just what we can’t allow to happen is unclear, the person with £50,000 in a DC pot may feel he or she needs advice, but quite what an algorithm will do is unclear. A list of options sounds precisely what someone looking for a definitive course of action is trying to avoid.

The obvious solution for someone with a guaranteed pension, is to sit back and relax. But judging by the £10.6bn transferred out of DB in Q1 2018 ( a record by some distance), this is the last thing that people want to do. They do not want a relaxed retirement, they want to manage their DC pot. So just what are the 94% of people who aren’t taking advice, actually doing?

Presumably they are advising themselves. They may, as those at tomorrow’s Great Pension Debate will do, listen to Paul Lewis and put their money in cash (much to the FCA’s displeasure). They may spend their money on fast cars, loose women and intoxicating liquor (thus sorting their longevity problem). They may even buy an annuity to regulate their consumption and insure against extreme old age. All of these are legitimate strategies and represent the freedom and choice so generously offered us by George Osborne.

But none of these solutions can really be regarded as “a gilt-edged product” since the solution is a) non-advised and b) they need to make every penny count. I know this because I’ve been paying attention to KPMG’s blog.

“Arguably, the needs of DC members are even greater. Not only do they need advice on what to do when they retire. Unlike their DB colleagues, they also need guidance on how to accumulate wealth, whether that’s pensions or other long-term savings such as ISAs or property. And with smaller pensions pots, it’s even more important to make every pound count.”

This kind of talk makes me so confused , I want to lay down in a darkened room and put ice on my forehead,

The problem for people with small pension pots is that advice is just expensive for them as it is for the people with big pots. But as advice is generally charged as a percentage of assets under advice, the impact of “small pot advice” is to obliterate any chance of achieving the financial goals that the advice is supposed to provide.

For instance, if the cost of advice is £2000 pa, then that’s 4% of a £50,000 pot, about the level of drawdown recommended using the “4% rule”. By my estimate, the total cost of intermediation for a typical £50,000 pot is well in excess of £2000 pa – certainly if you include the over and hidden costs of fund management.

There is much hand-wringing  in the KPMG article

Three quarters of attendees at our recent Rethink Pensions seminars believe that members are unable to easily source appropriate and cost effective transfer advice when they need it

But precious little questioning about what cost-effective transfer advice amounts to. I like this simple headline, which is based on the same random sampling as the KPMG survey.

If this second view is correct, the very best thing about transfer advice is that it isn’t generally available.


Financial constipation

Perhaps the greatest irony of the pension freedoms is that most people – once they have got their big fat pension pot, find themselves incapable of spending their money. This phenomena has been observed in America, Canada, Australia and now in the UK.

If you swap out a wage for life for a big fat pot, you end up with financial constipation.

If you take my advice, you will get a pension paid to you for your lifetime, and if you pre-decease your spouse (or increasingly your partner), they will inherit a pension to keep them going. My Mum is currently enjoying a wage for life earned from her husband’s medical career.

You will find it easy to spend your pay in retirement as it feels just like getting paid while you’re at work. You will not get financial constipation with a pension.

No adviser will go short because of you

If you are in the 94% of the population that does not take advice, you can be consoled by the knowledge that you are not making a financial advisor homeless.

Financial advisers are not short of wealth to manage or people prepared to top-slice their wealth to pay for advice.

The aforementioned robots with artificial intelligence are not proving popular. People like a financial adviser rather as the aspiring middle classes in the 19th century liked having servants. It is a demonstration of their arrival in wealthy circles.

This is the only reason for the existence of St James Place.

My advice to you.

Al Cunningham asks his clients requesting a transfer “what makes you special?”. Al’s right, most people do not have special needs, they need a wage for life. They do not need a big fat DC pot, the tax-free cash is quite enough. They probably don’t need Al either, except to ask them what makes them think they’re special!

If you are reading this and feeling guilty that you are not taking advice about your £50,000 DC pot is to stop feeling guilty. Your £50k pot is worth about £200 pm for the rest of your life – which is about what you have been saving (if you are a typical DC saver).

Do not believe that a financial adviser can convert your £200 pm into financial security by charging you £200pm in fees. That won’t happen

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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