AgeWage suggests that for the 94% of Brits who don’t pay for financial advice, there needs to be a radically better deal.
This is how advice works today
Since the Government abolished commission in 2013, advisers have had to charge their clients fees and most clients don’t like paying the fees they’re charged.
There are three reasons for this
- The cost of regulated financial advice is seen as too high
- People aren’t used to paying directly for financial advice
- People are distrustful of financial advisers
For the 6% who pay for financial advice there is a highly skilled group of some 24,000 high-integrity professional advisers. Many of these advisers charge fees independently of financial products as a fixed fee or at an hourly rate. Such fees are subject to VAT and really do pay for independent financial advice.
But most financial advice is paid for on a dependent basis, where payment is not invoiced but taken from the investment policies advised on. This cannot be called “independent” for the obvious reason!
Product dependent advice has three big advantages to ordinary people.
Firstly it exploits a VAT loophole which means it can be charged VAT free and as most people can’t claim back VAT – that makes such advice available at a 20% discount
Secondly, it can be paid for from tax-advantaged products, meaning that the advice is effectively getting tax-relief.
Thirdly, the money comes out of a pot and only appears as a deduction from the investment account. No money comes from the bank account, no cheques are signed and the transaction is – from the client’s point of view – frictionless.
Unsurprisingly, most advisers prefer to use this kind of “product dependent” charging – rather than invoicing. Provided that the organisation operating the fund platform (the platform manager) operates a system which allows the adviser to get paid this way, the adviser does not have a bad-debtors issue.
There are of course a few snags. Many pension providers don’t mange platforms which “facilitate” adviser charging so these providers don’t get used much. NEST, People’s Pension, Now and Smart Pension don’t offer adviser charging (as examples). Consequently, though these providers offer low fees and value for the money, they don’t tend to get inflows from those taking financial advice.
Although the FCA thought that abolishing commission would do away with product bias, it hasn’t really. Most people still find themselves steered towards products that pay advisers through adviser charging rather than products (like NEST) that don’t.
Advice for Middle Britain is product dependent and it’s going to stay that way until providers like NEST adopt adviser charging or the Treasury (through the FCA and HMRC) take away the advantages to advisers and clients – of product dependent advice.
I’ve been writing about this for some time. My position is changing, I now see the need for people to take advice as more important than the purity of invoiced charging. I no longer worry about dependent charging, which I see as distinct from the conflicts created by “contingent charging” – something specific to DB transfers
AgeWage says “pay from the pot”.
Given the choice of paying for advice from your pension pot or paying for the advice +20% VAT out of your bank account, we’d expect 94% of you to pay from the pot.
So when it comes for paying for financial advice, we want you to know what you’re doing. You are paying a lot less but you are going to get a second best service. It’s like buying a car- sometimes it’s best to buy not the top of the range – but the car that’s a little less good but a lot cheaper.
We advise middle Britain to do as much as it can itself and when it needs advice, to purchase it from the pot.
A radically better deal
We need to understand the trade off. Understand that “dependent (contingent) advice” is not best advice but the 90% solution we can afford
If we aren’t in the 6% who pays directly, then the next challenge is to get dependent advice which is value for the money leaving your pot.
That is the subject for further articles – articles that will focus on effecient processes, the appropriate use of technology and lower margins for advisers.
We think that advice for middle Britain can be delivered at radically lower cost.
We also think that advice can be simplified rather than dumbed down. Most of the questions that people ask do not need advice, they need good information. When people need to be told what to do, they need to know what they are paying for and how much it’s going to cost. They should be given the option of a money back guarantee if what is delivered doesn’t meet expectations.
Advice has got to be a product which people can assess and value.