Back in the day, when financial advisors sold personal pensions, the commission they received was funded by a mortgage on our policies. Over the years, the 4 or 5% charge on our investments in the first two years of savings more than covered the payment to the adviser.
Was the cost of this advice value for money? Most definitely no!
The commission was justified by its being an upfront payment for a lifetime of advice. But this advice rarely materialised and the last most punters saw of their adviser was him walking off with their application form.
Advisers were targeted by sales, incentivised by sales and valued by sales. The long-tail of advice – promised at the point of sale by the adviser – was never part of the adviser’s business model. Insurers chose to turn a blind eye to this. After all they too were targeted incentivised and measured by sales – by shareholders.
The failure to deliver on the promise of lifetime advice hangs over financial services. It is in an
Why insurers back guidance
Back in 2015, the ABI backed the guidance guarantee offered by George Osborne as part of his pension freedoms.
At the heart of the Chancellor’s proposals is the provision of a ‘Guidance Guarantee’ to help ensure that the greater freedoms being offered to people approaching retirement are not put in place without an improvement in the overall financial capability of those being faced with a wider range of choices. We welcome this and want it to be a success.
Some insurers now go further, while Osborne guaranteed us the right to guidance, some insurers want the Government to guarantee that we are “guided”. Speaking with a policy adviser of one or our leading pension insurers this week , I was told that requiring people to take advice before getting their retirement money back was no different from mandating people to take a driving test before driving a car.
Where would this guidance come from? From Pensions Wise of course- delivered from the recently revamped Money and Pensions Service (MAPS). And what happens when you get guidance from MAPS – you get told to speak to a financial adviser – that’s what.
Speaking to a financial adviser cost money – it either generates new commission or requires you to pay a fee. Either way you are paying for a second time for this advice.
Insurers want you to pay for advice for two reasons, firstly it gets them off the hook for the advice that people never got and secondly it puts the complicated products that insurers peddle in retirement – back in play. It’s second time lucky for the likes of Just and LV= and a repeat sale for the legacy and workplace pensions.
There are very good reasons for insurers to promote , mandatory guidance and it’s all about their bottom lines.
Why we should be wary of mandatory advice.
I am not a fan of mandatory advice. The idea pre-supposes that pensions are too complicated for us to manage on our own. This may be true for some – and those people should take advice, but it is not the case for the silent majority of Britains.
Most of us could get by very nicely in retirement without recourse to financial advice. Simple financial products such as the State Pension and deposit accounts , supplemented by means to turn pension pots into wage for life products (annuities and CDC) do not need advice, they just need the help to understand the choices (choice architecture if you must).
Mandating guidance means promoting advice unless simple products are available. You can be pretty sure that the insurers are not going to promote the State Pension , CDC which leaves the complicated drawdown stuff and annuities – which need broking.
The truth is that insurance products need to be complicated , otherwise advisors aren’t needed and advice needs to be justified by decluttering insurance products. Providing simple retirement products that don’t need advice would be bad for everyone but the consumer.
So what guidance is doing – is forcing people down the path of advice or making people feel they are taking big risks. Pension Project Fear (pt 94).
We should be wary of mandatory guidance because it formalises the close shop between insurers and advisers and leaves the consumer with no choice. Think of how you have to walk through duty free to get to your departure gate.
What’s needed is simple and easy pension choices.
Rather than lobbying for the promotion of advice through mandated guidance, insurers should be looking to simplify the choice process by being more transparant about the past and presenting people with simple choices for the future.
It should not be for the Money and Pensions Service to clean up after the insurers, nor should it become a sing-posting promotional service for advisers. Instead , MAPS and Pensions Wise should focus on giving people a high level understanding of the pensions choices available to them.
If they don’t know how to do that, they should watch this video from Quietroom
I do not want to have to walk through miles of duty free to get to the departure gate, I have to. Similarly, I don’t want to have to take guidance on my pension decisions, especially if it means I am recommended to take advice.
I want simple and easy choices – like those laid out by Quietroom and I want to make my own mind up about guidance and advice. I do not feel I should have to have the equivalent of a driving test to draw my pension .
If I need a training course to drive my Lamborghini, I’ll take the bus instead.