The Hurdles We Face

Solomons-financial-advisor-wimbledon-blogger

Like most advisers, I regularly have enquiries as a result of the new pension freedoms. In essence, someone wants to move money out of a pension and the Pension company have told them that they cannot do so unless an adviser signs the forms, by which they really mean, takes responsibility for the advice if or when it all goes wrong. So after attempting to explain why I will not do this for the umpteenth time, I thought that perhaps a post about it would be easier… its lengthy, but provides context. If you are in this position and cannot find the time or energy to read 4 pages, then you really should not be messing around with your pension.

The Hurdles We Face

In the past, most people received a poor service from their financial adviser. As advisers were paid based on selling products, some of which were good, some of which were awful. The majority were unlikely to see “their” financial adviser (assuming s/he stuck around) unless the adviser believed that there was another chance to sell a product and thus earn some money.

Free Advice Illusion

The illusion of “free advice” was perpetuated by the product providers (the big life assurance and pension companies). They made it worse by having incredibly complex charging structures. They competed for business based on spurious data about past performance coupled with extra commission, above the agreed standard LAUTRO rate. Unhelpfully each product had a different rate of commission anyway so it was always likely that you would end up with a product that suited the adviser rather more than it suited the investor. In the late 1980s there was also the added problem of Independent Advisers being forced to disclose commission whereas Tied Agents didn’t (and couldn’t) Tied Agents were paid much more commission in any event. It was Tied Agents that were largely responsible for mis-selling of pensions. The collective advising legacy of Tied Agents is now shaped in the form of the largest financial advice company in Britain.

Suits you sir…

As an example, £200 into a pension typically paid commission to the adviser of around £2,300 and then about £5 a month after 4 years until payments stopped. The same amount invested into a PEP or ISA would pay typically £6 a month for as long as the payments were made (£72 a year). PEPs and ISAs did also include a fund based commission of 0.5% as well, so on a fund worth £2400 this would generate another £12 a year (plus growth) – £2,300 now or £84 over the year? (not hard maths).

This invariably resulted in bad selling practices and inappropriate advice. The result was marginally better regulation, improved qualification requirements for advisers and a ban on commission for investments from 2013. All advisers had to charge fees and agree these with their clients.

Unfortunately, this has not prevented criminals being criminals. The digital revolution which has helped on many levels is now under constant threat from fraud. Standards have had to be raised. What most people don’t appreciate is that the advice provided by financial advisers needs to be suitable, it sounds rather obvious but has implications. The most significant being that the adviser is liable for his or her advice not simply at the time, or their working career or indeed their lifetime, but for eternity. We are the only group on earth that can be sued posthumously (our estates).

Tongue-tied about risk

As a direct consequence of the historic mis-selling, any insurer providing professional indemnity insurance (a mandatory requirement to hold) takes a fairly negative view of bad practice and particularly “risky” products – which don’t necessarily mean investor risk, but those that invariably have been used to scam people. This has resulted in fewer insurers, higher premiums to the point that many advisers consider this a tax on good practice rather than an insurance against unlikely complaints.

Common Sense Revolution

A good adviser will always want to look after their clients well, forming a long-term relationship where a good service is provided and is financially rewarding to both the adviser and the client. Most advisers now look after their clients much better, adding significant value over time. There is much documented evidence for this (google adviser alpha).

The risk to the adviser is now more likely to be a bad relationship with a client, that results in a complaint, so service is vital and actually serves both client and adviser much better anyway. So very few advisers are now willing to take on a “one off” piece of work. The risk of things going wrong is too great.

Getting to know you

In a typical process an adviser must demonstrate that s/he knows their client before offering advice. This means sufficiently understanding the clients existing arrangements, circumstances and plans for the future, all within the context of the current real world. Here’s a brief list of the sort of things we require.

· Evidence of your identity and residency (are you a potential fraudster?)

· Family circumstances, context (who else is impacted?)

· Income and tax information (to reduce but also to avoid fraud and evasion)

· Assets (on a global basis)

· Liabilities (on a global basis)

· Existing arrangements (old employer pensions etc)

· Giving (historic, present and planned)

· Current spending levels (where does it go? How much does life cost you?)

· Goals (why, when, who, what, how?)

· Attitude to risk and capacity for loss

· The content of your Will (where will all the above go?)

I could go on, but you probably get the point. Obtaining all of this isn’t as straight-forward as you may imagine either. Whilst you may loathe insurance companies, I can assure you that tracking down and obtaining the right information from them about you is enough to test the frustration boundaries of anyone. Additionally, some people are simply not good at facing difficult truths – such as their own lack of financial control and an unwillingness to confront the basics of something that reveals where it all goes (like an expenses statement).

Trust me, I’m a…

So we’ve now gathered the above, we need to assess it and analyse it properly. Then in light of your aims, what’s realistic given your resources, appetite for risk and ability to cope with loss, we can put together solutions from everything that is “out there”…. Which to remind you is an ever evolving, changing, competitive marketplace, so what’s “best” last week may not be so today.

Committed to paper

We then provide a suitability report, which is meant to be read. Most are long because a lot needs to be said, but we also operate in a climate of complaint and many complaints are won based on what was not said by the adviser than what was done or even whether the adviser was “right”. The client is a human and wants to simply get on with life and not read a very long document about financial stuff.

Then there is the issue of fees and investment costs. We have evolved from the delusion that advice is free, but most people still believe that it is cheap. Even with very good technology (none of it joins up) completing the list earlier and creating a “file” takes about 2 days for the typical person, that assumes the information has arrived.

Fees

Anyway, fees – most charge to look after your money, so will take a percentage of this. The more you have the more you pay (as with most things in life). However in our unnecessarily complex tax system, the more you have invariably means the greater your options and the greater the complexity. Just for a benchmark, complexity probably starts at income of £80,000, but could be a lot lower depending on your age.

Fees come in all forms, but in essence I see six

1. The first is to implement or arrange something (i.e.. ISA). Some call this an initial charge. In essence, it is the result of a recommendation to use XYZ investing in a portfolio of funds with ABC, which is suitable because…. Charges are typically 1%-5%

2. Ongoing management and looking after of the arrangement – the idea being that stuff changes, you need to make adjustments to keep within the parameters that were established. Perhaps switching funds within the portfolio, rebalancing or changing the “shell” of the investment to something now better. Charges are typically 1%

Both of these rely on you having money to invest and look after. Its not that different from commission, invariably taken from the investment rather than your bank account. It works but its not perfect. We know that it isn’t perfect as well, but its how most of us work.

3. The service fee, this is often paid as a retainer and provides for the cost of meetings and keeping all your stuff (old style and new style) up to date and keeping you in the loop, charges are typically £50 – £500 a month

4. Ad hoc fees – for specific, often complex pieces of work but of course nobody does this unless they are fully furnished with all the facts about you (as per my list). Charges typically a minimum of £300

5. The financial planning fee – this is really where the best advisers are heading. In theory you don’t need any money to be invested with your adviser, they design a financial plan, which will take account of all you have and reveal a version of the future so that you can actually know how much is enough, what you need to do and so on, irrespective of who ends up investing the money. A financial plan can be a mammoth document covering the reasons for each assumption made, or it can be reduced to the headline charts, showing you the what and why with a list of action points. A financial plan will cost at least £1500, some ten times this (remember complexity and options). Some advisers recognise that this is often “new” for their clients and discount it heavily to £500-£750 be warned that this also indicates their lack of confidence in the value that they are offering. Financial planning is a real skill, not simply a new label.

6. The no strings fee. This is the latest attempt to separate financial planning and perhaps behavioural coaching from your money. You pay all fees directly from your bank account, irrespective of how much you have. Naturally there will be some expectation of a correlation between how much value is added or work done, but payment is separate. As a result, there will be no adviser charge shown on any illustrations as the adviser is paid separately. This of course, makes the illustrative projections look much better. The adviser will be paid what was agreed irrespective of results. To be blunt most of us would prefer to work this way, but don’t have clients wealthy enough to do so. Those that do, successfully tend to charge £5,000 – £30,000 a year for their services. Note that the fee is not necessarily related to time, but more likely value. Consider a tax planning saving of £800,000 what is that worth?

Show me the money

In the attempt to protect and help consumers the regulator has ensured that fees and costs are reflected in all illustrations (evolving since 1995 with “commission disclosure requirements”). Illustrations now show the impact of investment charges and adviser charges. These are significant and appear to cannibalise your investments. When coupled with low rates of growth used for illustrations and a well-intended “remember the impact of inflation” the resulting illustration far from helps consumers, but puts them off ever bothering to move money out of their bank account, (which if run by the same illustrative rules, would have you spitting blood).

Full circle…. Back to affordability and making it appear cheap

The truth, as uncomfortable as it may be, is that financial planning and good financial advice are now largely out of reach (price wise) to most people, due to our operational costs and the need to make a profit so that we can come back next year and do this all again so that our clients are looked after properly within the context of accurate information. It is an exhausting process. Most advisers I know (and I know a lot) would all want everyone to have better financial advice and are actively seeking ways to help through new media (podcasts, blogs, Vlogs, books, seminars, free downloads etc). Naturally, we hope to attract some new good clients, but we are also keen to help educate and improve financial literacy. We call it the savings gap. It’s in all our interests to help Britain become a nation of financially independent adults….the alternative is really rather frightening.

In conclusion (finally!) I cannot do a one-off piece of work for you. It isn’t in my long-term interests to do so (and probably not yours) without doing a proper job. Any adviser that offers to do so is at best deluded and perhaps desperate for money; at worst somewhat economical with the truth and likely running the risk of taking cash for forms, aiding scammers, knowingly or foolishly. This will result in further complaint, the inevitable failing of his or her business, and a compensation bill that the remaining good firms have to split between them (known as FSCS levies). Such a system has numbered days and is currently being reviewed in a fairly timid fashion. This really infuriates most advisers, many of whom vent in online sector forums and can easily be found on topics like Unregulated Collective Investment Schemes (UCIS) or Defined Benefit Pension Transfers or any recent receipt of a regulatory invoice from the FCA or FSCS, despite this there has been little appetite for opposition to a regulator that appears powerful yet out of touch.

When all is said and done, nobody can guarantee anything in financial services. Trust needs to be earned, I believe that this is done by being transparent and keeping promises. Quite how or even how much advisers are paid becomes largely irrelevant under such conditions. Any good financial planner or adviser wants a good long-term relationship with clients.

I genuinely wish you good luck in your endeavour to find a trustworthy, ethical adviser that has possesses business acumen. At one point there were over 250,000 people selling pensions and insurance products, there are now about 25,000 registered individuals who are licensed to do so across 5,720 firms, the vast majority of which are not yet financial planners. You could search my social media account to find some, but in general those are the elite advisers. Beware that search engines or directories are also paid-for marketing tools.

Think I’m wrong? today a report about pension transfers from final salary (“gold-plated pensions”) continues to press the point that advisers cannot be trusted. Nobody appears to have any notion of the cost or risk involved, everything is assessed in terms of a price for filling out forms. See Professional Adviser item by Hannah Godfrey.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

Email me to get in touch

The Hurdles We FaceDominic2023-12-01T12:18:19+00:00

Should advisers fear being black listed?

There are numerous benefits of social media. One is the ability of peers in any field to discuss topics and share ideas. Sadly this comes with the inevitable double-edged sword of whether to post under your real name or a pseudonym… or “nom de plume”. This I assume is connected to a fear of being black listed.

Of course there’s a lot to disagree about, and it appears that many will take considerable time to vent and click send. Not always a great choice, I’ve been guilty of it myself. There is a general perception, whether explicit or implied that somehow anything critical of those in power will result in some form of retribution. Hence many publish comments under false names for fear of being “black listed”.

Invariably the problem within my own sector is that of fear of the regulator. Of course on the one hand I think this is quite a good thing, advisers ought to be “afraid” of the regulator. That would really mean that they are surely there to keep people on the “straight and narrow”. So I welcome good, strong regulation – it’s in my interests (and yours). The hope is that strong regulation reduces the potential for people to be ripped off.

A critical voice brings change

On occasion, of course some criticism of the regulator is entirely appropriate (after all is anyone or any organisation perfect?). It is this that advisers fear (good ones too). The concern is rather obvious – raising a critical voice may be met with a sudden barrage of requests for information, which can prove time consuming and frankly unnecessary. I take the view that the regulator needs to be held to account and publish under my name. Frankly it is rare that I am critical of them – my main gripe is invariably a difference of approach to the way investors who have suffered scams or mis-selling are compensated following advice from “bad” advisers.

At present, the system is such that “bad” advisers rip off investors. The product, fund, adviser and their PI cover all fail and the remaining “good” advisers pay the compensation. By remaining, I really do mean a diminishing number. At one point there were about 250,000 “financial advisers” today there are about 22,000. Most advisers pass this cost onto their clients. To date, I haven’t despite a 30-day demand for payment increasing by 67% in 2015 on top of a 69% increase in the previous year! Hard to explain and pass on such fee rises in a period of virtually no inflation!

I don’t think I’m being too radical or inflammatory in my industry comments. This isn’t the 1950’s, McCarthyism has not returned (as far as I can tell). On which note, there is a very good new film out called Trumbo – the true story of a man that was blacklisted by some very unsavoury people in Hollywood. Trumbo was forced to write under a pseudonym to allow him to earn a living and he wasn’t ripping anyone off. I’m not so sure that advisers publishing under pseudonyms is really the same thing at all. I wish I had the creative writing skills of Trumbo! I only stand with him in the sense of being free to write or speak without fear of reprisal.

Oh, and you are welcome to check out my industry comments online at places like New Model Adviser, Financial Adviser, Professional Adviser.. but they are pretty dull and aimed at advisers.

Here is the trailer for Trumbo, you may recognise Bryan Cranston (who plays Walter White in Breaking Bad) and Helen Mirren has a small role, but has you piping venom… well it did for me. It has only just been released here in the UK… its one of the few films that I gave 10/10… but of course I may have been influenced by issues raised here!

Dominic Thomas
Solomons IFA

Should advisers fear being black listed?Dominic2023-12-01T12:19:27+00:00

Pension Exit Charges

I wonder if I can be honest with you about pension exit charges? I freely admit that I probably spend too much time concerning myself with what others within my industry think. I spend a lot of time improving my knowledge and this involves reading both technical papers and opinion. Yet I find myself increasingly perplexed by the comments on industry media outlets.

THIS IS A LONG ITEM, BUT PLEASE STICK WITH ME…

Like it or not, the financial services industry regularly gets berated for being nothing short of self-serving. Often different or indeed competing elements of the spectrum that make up the financial services get lumped together, frankly this is our collective fault for not clearly defining or explaining the differences, invariably made harder by really rather poor regulatory clarity.

However I was utterly exasperated with my peers on yet another comment section within the “trade press”. This concerned the issue of exit penalties on pensions. At the time Mr Cameron, the Prime Minister was expected to outline his frustration with pension companies that apply high exit fees… for the sake of simplicity, let’s call them what they really are – transfer penalties.

Old World not New Model Advisers

The comments appeared in a publication that I respect by Citywire – New Model Adviser, the article written by a very thorough journalist, Will Robbins. The publication aims to high-light good or best practice and aims to help improve the advice sector and thus help achieve better results for the investing public. So one would hope that the readers and their comments are towards the front forward-thinking end of the adviser population.

The King is dead, long live the King

On the topic of exit penalties it seemed to me that commentators reverted to their historic stances as salesmen, not advisers, preferring to defend high penalties rather than lead a revolution to have them scrapped or at least capped.

Investors are being ripped off

Yes it is true that pensions set up were contracts and that contract law is therefore under the microscope…. but there are times to simply admit that enough is enough. I have seen some horrendous penalties (the difference between the actual value and the transfer value of a pension)… some taking well above 30% of the fund. That is simply not good enough. OK there was a contract, but neither “adviser” nor investor could have anticipated these penalties which have become increasingly pertinent as investors and advisers seek better, more efficient and cost-effective solutions. Something that I regularly do to great effect for our clients.

Analogies have flaws but…

However suggestions that imposing a cap were largely greeted with derision. I was under the impression that it is the advisers job to represent the client, not the pension company and if engaged by them, to seek the most suitable solutions. I would like to think that it is in the collective interest to allow someone to move their money elsewhere with minimal fuss and cost so that it can grow better (hopefully) – and yes it cannot be guaranteed…. at least it cannot be guaranteed in a way that your life is not guaranteed by the protection that the airbags in your 2015 car should deploy if you have an accident, as opposed to your 1986 car that doesn’t have any of the current safety features. Yes you may be maimed or even die in the accident, but which do you think is likely to provide a better journey?

Aren’t we meant to put you, the client first?

In an industry steeped in scandal and mistrust this ought to be an opportunity for pension companies and advisers to put clients interests first. I find this even more frustrating as in reality it is all to do with commission and the lie that advice is free. Old style policies are those that typically paid high levels of commission, which the pension company advanced to the adviser as payment for arranging the pension with them. Of course it didn’t help that some pension companies offered more commission for using them as opposed to others, thus bringing into question the independence of the advice and adviser. If you went to a Tied Agent or Bank, you didn’t even get any option to compare costs…. which was the job of the IFA at the time.

Thinking that is so last century…

This has been going on for years, yet alternative approaches have also been available for those willing to face some truths. In 1999, 16 years ago I formed Solomons, removing commission, charging 1% on any investment or pension product – no matter who… a level playing field. 16 years ago! The regulator eventually caught up and banned commission on investments from 2013 called RDR so since then all advisers have had to charge fees properly.

Vive la revolution

Why does this vex me so? well as someone still in their 40’s I expect and plan to remain advising clients for many years to come, so I’d like to see things improve. I would like to see the standard of advice improve and the number of scandals and complaints decrease… not least because invariably the way compensation works is that those left working within the sector pay the compensation levy, even if they had nothing to do with it. This summer I had yet another regulatory invoice for this levy, an increase of 64% on last year…there comes a point when I and many (thankfully) like me, simply cannot absorb all these costs without jeopardising our own sustainability.

If you are fed up with your pension or not even sure what its worth, please check out my free guide, which will help you regain control of your pension planning. There ought to be a box below to download this, if not just email me.

Dominic Thomas
Solomons IFA

Pension Exit ChargesDominic2023-12-01T12:20:04+00:00

The new rules about independent financial advice

Independent financial advice

This morning I attended a mini-conference run by the ICAEW helping financial advisers to ensure that if they hold themselves out to be independent, that they do indeed provide independent financial advice. This is a hugely important issue and so I was a little surprised to find that there were not many in attendance, perhaps because it was a pay-for event, or of course, perhaps many advisers felt that this was not a pressing issue for them.

New rules are black and white

Independent financial advice is important to me, because I believe it enables me to provide a far better set of solutions for clients – being unrestricted and therefore the widest number of options. The new year saw a clear regulatory distinction between the types of licensed financial adviser – either independent or restricted, not a mix or a fudge. There was helpful legal insight from two Barristers who helped unpack the nuts and bolts and attempted to put this into plain English. One would have thought the distinction should be fairly straight-forward, but as ever, words and phrases are open to interpretation. One position might argue that to be truly independent, the adviser must consider all forms of investment products from the entire planet – including those not written in English. The FSA define independent financial advice as:

“a personal recommendation is based on a comprehensive and fair analysis of the relevant market and unbiased and unrestricted“.

This it the litmus test for independent advisers. This is built upon a series of basic principles of being a faithful fiduciary and legal test cases of what constitutes a professional adviser (in any field). This is of course what I do have done for clients – the main issue being one of applying a degree of common sense and filtering out options that are either certainly or highly likely to be unsuitable investments for a client. By way of a silly example, a ponzi scheme would be an unsuitable form of investment in my opinion.

Independence should not be compromised

The problem with all advice is that the end result takes many years. One of the many reasons I spend time with clients reviewing their planning, is precisely because things change and we need to revisit assumptions. We have to apply common sense and frankly a high degree of transparency and not hide the reality of performance, charges or choices. The new rules don’t really make a lot of difference to our clients in terms of our transparency, however many firms are unable or unwilling to do the work to be independent. I admit that the work can be onerous, but be warned that dismissing the new terminology as “nonsense” is a mistake and folly on the part of any adviser. Sadly many of our “trade bodies” are now also fudging the issue of independence, which is why I do not belong to them and joined IFA Centre, which promotes the value of independent financial advice.

Going deeper and further

I would suggest though that the issue of independent advice doesn’t really go far enough for me, impartiality is more difficult to achieve as it precedes investing. I would suggest that it is not only vital to be independent, but also vital to be impartial – by which I mean, being open to the notion that paying off debt might be a better use of funds, or making “investments” into a variety of “things” that don’t come under the remit of financial advisers – such as buying art, residential property, a business or even giving the money away. This is why I attempt to distinguish between financial planning (creating solutions and options to solve problems or objectives) and investment advice, which by its very nature assumes that investing in traditional financial instruments – stock markets and bonds is the appropriate solution. I want bigger, deeper and wider conversations with clients about their values and priorities so that impartial advice can be provided. This is, to my mind a better result.

The new rules about independent financial adviceDominic2023-12-01T12:23:24+00:00

The RDR Advice Gap

You may have heard of something called “the advice gap”. This is a relatively newly coined phrase used to describe the expected result of the FSAs Retail Distribution Review. The accusation being that as a direct result of RDR, fewer people will receive advice. Why? because in order to receive advice, clients will have to pay a fee, commission is banned. You would be forgiven for assuming that I would be delighted by such news – after all, I set my firm up in 1999 on a fee basis, our clients pay fees. True. However my clients are not “average people”. They have wealth and want to use it to enable them to improve and maintain their lifestyle for the remainder of their life. They are forward-thinking and responsible. They are independently minded and not reliant upon the State (or presumably a fairy godmother) coming to the rescue.

Complexity Breeds Paper

As I have said before, my clients are therefore not the “norm”. There are many people that have great difficulty with their finances and have little understanding of or the ability to apply many financial planning concepts. The cost of providing financial advice has soared. Unlike many other professionals (doctors, lawyers etc) financial planners cannot simply provide one page prescription. There is mountains of paper justifying why something needs to be done, how it has been selected and so on. This is largely to satisfy the regulator and also a future court of law, should a complaint be made. Neither are terribly inspiring reasons are they? In addition, all advisers have improved technical skills and the financial landscape has become ever more complex, with the need for ever more expert guidance.

End Of The Free Lunch

RDR was intended to break the relationship between the product provider (pension/life insurance company) and the adviser which could be manipulated by extra or different commission between products. This created a decidedly uneven playing field and provided precisely the motivation in 1999 for me to create a level playing field so that there was no difference in our charge, irrespective of provider or product, thereby demonstrating impartiality. Frankly RDR could have simply stopped there. However from January all advisers will have to charge a proper fee, ending the myth once and for all, that advice is free. Unfortunately, advice and service is rather expensive, despite the many advantages that technology brings to efficiency of productivity. As a result, many people will be understandably put off paying fees, in the same way that many are put off paying for a dentist, or eye check up etc. It is also the case that good financial planning needs regular reviewing. A distinction between a financial planner and a financial adviser is probably that the former doesn’t really focus on products, and provides a regular review service. An adviser, well probably could be a one stop shop – sorts a problem but doesn’t really join everything together. Why regular reviews? well think of your planning a bit like a plane flight, one degree off course at the start may not make much difference for a few miles, but if not corrected will ensure that you don’t make it to your intended destination. A financial planner is like the pilot, adjusting the financial architecture regularly to keep on track.

Do-It-Yourself, Really?

In practice this means that many people on average or below average wages will probably not pay for financial advice. They will be forced to do-it-themselves. As a nation, we aren’t good at looking after our own long-term interests when left to our own devices. Think of all those gym memberships in January. Of course, some people are, but most simply lack the required discipline or knowledge and let’s face it finance is fairly dull, (OK very dull). I recently attended a talk by a well known adviser who writes in the national papers who summed up his 40+ years of advising people with only one couple investing sensibly when left to their own devices. However, this couple sat down every day to review their portfolio. To my mind that is not financial planning, that’s investing and terribly stressful and rather a waste of life.

Another Banking Crisis?

To compound the problem, Banks are not trustworthy and most will not be providing financial advice, earlier this year (or perhaps last, its all such a blur or excitement) analysis was done that revealed that the cost of a Bank providing advice was at least £250 an hour. Given the current climate, can you see that working? no? neither could they – so they have stopped providing advice to all but their high net worth customers, though I have no idea why these people use them as the Banks are really rather poor at advice and service. Coincidentally, when the FSA ceased their own final salary scheme in March 2010, they offered staff the option of seeking independent financial advice about their options offering £250 towards the cost of the consultation. This at least acknowledges that independent advice is best, but clearly fails to appreciate the cost.

Back To The Future

Just to put a final twist on things, from January advisers will either be “restricted advisers” or “independent advisers”. In other words back to polarisation that should never have been scrapped in 2005. It only enabled Banks to sell more stuff that they weren’t able to understand. This has led to the term “the advice gap” which simply put means – people that won’t or cannot afford financial advice. Most financial planners will have to focus on their more wealthy clients, yet very few (and I really mean a very small percentage) actually have a workable, sustainable business model that enables them to look after clients properly and profitably, ensuring that they are there to do the same next year. Fortunately for me, I’ve been developing and improving my business and services since 1999, so have a rather long head-start on most.

Technically RDR comes into effect on 31st December. So that’s just under 4 weeks time, but allowing for the Christmas season – rather fewer days. The House of Lords has finally begun to understand the implications of the advice gap and has been debating the topic, in a typically empty looking House. Interest is frankly nowhere except within the industry, but it does or rather will have a dramatic impact on everyone in just a few days time.

The RDR Advice GapDominic2023-12-01T12:23:12+00:00

Impartial Investment Advice

1939: You Can’t Cheat An Honest Man

Impartial Investment Advice

I spent the first half of this week at the annual IFP (Institute of Financial Planners) conference. The IFP are to my mind the leading professional body for proper financial planners. It is a fairly “top drawer” group who share ideas and work with a set of shared values and ethics. One of the most obvious identifiers about IFP members is that we all agree to provide impartial investment advice.

Discretionary Fund Managers

At one point, I was talking with fellow advisers about investments for clients. We are a pretty open and honest bunch, some do the investment themselves, whilst others outsource the service to a Discretionary Fund Manager or DFM. A DFM has the ability to trade and deal without asking permission from the client (other than at the very outset of the relationship). They are effectively a stockbroker. Some are pretty good, but many are pretty hopeless (and believe me, some are really very hopeless). Many advisers have been switching their clients across to DFM services, because they have been concerned that to invest money for clients carries compliance risk and many don’t possess the skills or time (or both) to look after portfolios. One of the most significant problems is evaluating performance and getting DFMs to properly outline their understanding of “risk”, “long term investing” and “volatility” and keep to the brief outlined for the client.

Impartial Investment Advice

Several of us agreed that one of the problems with DFMs is that despite the fact that advisers don’t manage the portfolio, they still get paid by the the DFM for effectively adding little of value to the client (it is clearly valuable for an adviser to review the performance of the DFM – and ideally establish the parameters). Another problem is that as DFM’s focus purely on investing, they tend to trade a lot, creating liability for capital gains and income tax, perhaps without regard for the full picture which is a significant advantage that advisers should have. Indeed due to VAT rules, this sort of service can be even more expensive to the client. Those that I spoke to admitted that they struggle with the ethics of advisers being paid the same amount if they hand off the work to a DFM rather than doing it properly themselves. This is one of those topics that simply doesn’t get talked about in clear terms, but it is refreshing to find advisers at the IFP that have high standards.

Impartial Also Means Being Open Minded

It would seem that the regulator tends to agree, having announced today that advisers cannot be paid by DFMs (but they can be paid by the client). I can see the logic and wisdom of this, but I’m now also concerned that as a result of this formal decision a couple of things may happen. If advisers don’t get paid by a DFM, I imagine that those that have told clients to use a DFM may find excuses to bring the money back under their management and would probably discourage their clients from using a DFM. I have already acknowledged that a DFM may be suitable for some clients, so a carte blanche “I never use DFMs” would seem to my mind to be very unwise and contrary to being impartial. This dilemma could all be avoided with properly agreed fees – something that we have always done with our clients.

Impartial Investment AdviceDominic2023-12-01T12:22:56+00:00

Independent Thinking – Singing It Loudly

1946: Stand Up And Sing – Rogell

Another day, another trip into the City. This time I was attending an event about the new world that is due to start from January, its a new world to those within financial services, but of course probably not to you. In a nutshell, there was a very good presentation by Gillian Cardy about why independent financial advisers ought to remain independent. Somewhat preaching to the choir you would think, but alas many firms feel so threatened by the new rules, that they would rather limit their options (and those of their clients) to a much reduced range. This will deem them as “restricted advisers” which I dare say will not be explained as well as it ought to be (the way the FSA, soon to be FCA require).

As I hope is obvious, I believe very clearly that independent financial advice is the best sort of financial advice. I’m not restricted to only advising on some products, but on pretty much anything. The important and rather obvious point is that being independent, I have access to the whole of the market and represent my clients best interests. As we have always worked on a fee basis we can also clearly demonstrate that there is no bias in selecting any product or provider – we get paid the same whatever is selected. Certainly an independent financial adviser has more research to do and arguably needs more skill and knowledge, but as far as I’m concerned we have been operating under the new 2013 rules since 1999. Our clients face little real change as a result. Our fees are properly and fairly priced. The main changes that we face are the improvements to technology and therefore we can constantly improve our services. So I’m expecting next year to be better than ever for our clients and I’m expecting to continue providing a great service, hoping that they will sing our praises.

We are a boutique firm of financial planners. We create financial plans designed to achieve a desired lifestyle. We will craft and implement your plan that will provide you with the greatest chance of accomplishing your unique goals based upon the values that you hold. Financial products are little more than the tools to achieve your required results
Call us today or visit our website for more information and to arrange a meeting

Independent Thinking – Singing It LoudlyDominic2023-12-01T12:22:50+00:00

Better Late Than Never

1949: Death of a Salesman – Miller

I have never liked commission. I don’t think its entirely bad, it does help people to pay for advice. However, I have always argued that if an adviser is paid to sell products, then it is hardly surprising that it is products that are advised. Hence when I set my own firm up in 1999, I did so without the normal problems inherent within financial advice. I charged fees for the work and a fixed implementation fee, which was the same irrespective of the type of product. This saved our clients thousands of pounds (and continues to do so).

Today the Managing Director Martin Wheatley of the FSA, soon to become the FCA, announced that he wants to see and end to mis-selling created by sales incentives. He is particularly concerned to tackle Bank staff who are incentivised to sell their products – everything from a bank account, credit card, cash ISA, loan all has a commission incentive to the Bank staff. He said:

“Why is it that every time I walk into the bank to do something simple, like pay my credit card bill, the person behind the counter asks me if I would like to extend my credit, take out more insurance or look at their competitive mortgage rates? When did this happen? Banks for me used to be a service – a place where you would go in, stand in a queue, have a pleasant chat with the clerk and go about your daily business. Some time ago, this changed – financial institutions have changed their view of consumers from someone to serve to someone to sell to.”

This does not apply solely to Banks, it applies to financial advisers, Fund Managers, Investment Companies and pretty much anyone within financial services. I’m with Mr Wheatley on this in principal, however we need to be careful not to throw the baby out with the bathwater. Motivations and incentives certainly need to be in place. People do not wake up and form a queue at my door for impartial fee based financial planning. I have to play my part to promote what I do and make people aware of why they should consider using my services. That’s even part of the motivation behind this blog post. So whilst I’m in full agreement, a note of caution as big budget Banks and Investment Companies may simply flood us all with information overload and of course if base salaries for these sorts of employees were to rise to offset the “lost” bonuses, it is likely to lead to either higher costs, passed on to us all or increased redundancies, which is passed on to us all in the form of additional State benefit burden. So yes Mr Wheatley I fully agree, but don’t let them get away with a smoke and mirrors dance on how this plays out.

Better Late Than NeverDominic2023-12-01T12:22:44+00:00

The Truth About Mortgages

1997: The Borrowers – Hewitt

The FSA published its review of the mortgage market on Friday. This did not make happy reading. Since the credit crunch crisis began (and yes I do not believe it is over) the difference between the rate that people borrow at and the Bank of England base rate has widened. Prior to the crunch, the average difference or “spread” between 2005-2007 was only 0.50%, it is now above 3.0%. The difference might be described as profit to the lender.

I’m still amazed to see that as of Q1 2012, income is only verified for around 70% of “low risk” borrowers – meaning that they are remortgagers and movers. “Higher” risk borrowers such as first time buyers have their incomes verified in 87% of cases, which the FSA think is an improvement on the lower level of around 70% in 2008. I don’t see why income is not verified in every case, unless there are exceptional circumstances. Even assuming sensible lending based on verified income, this would suggest that there is a margin for error of around 30% which is hardly inspiring confidence in the market.

Financial Advisers (rather than Banks) used to arrange around 64% of mortgages, now this has reduced to around 46%-56% according to the FSA. This reveals a growing market share of mortgages sold directly to consumers by Banks and Building Societies.

In terms of what people can borrow, there seems to be a shift by lenders, some of whom are lending 4.5x to 5.5x income. However compared to pre-crunch, lenders are not offering as many high multiple lending. This is precisely why a specialist mortgage broker (not me) is required to source the best mortgage based upon your circumstances, particularly as the number of mortgage products is returning to pre-crunch levels, but still lower at 2,991 different mortgages available. This is despite the fact that there are still relatively few mortgages requiring a deposit of 5% or less, although more are becoming available. The bulk of borrowers now have 25%-50% deposits. The proposition of interest-only mortgages has also reduced considerably, though this was a general trend over the last 10 years. The balance of power has altered, in part due to the collapse in the number of financial advisers offering mortgages, (which would include ourselves) almost halving since 2005. The result has been that the top 20 mortgage lenders have gained an increased market share, now at 94% of the entire mortgage market, I suspect you could name them all. On the whole, though mortgage sales have remained fairly static since 2009 at less than half the amount it was in 2005.

The Truth About MortgagesDominic2023-12-01T12:22:44+00:00

FSA RDR Consumer Guidance

1968: The High Commissioner – Thomas

FSA RDR Consumer Guidance

Today has seen an update to FSA RDR consumer guidance, which is information to the general public about the Retail Distribution Review (RDR). This can be found within the FSA website. This is meant to explain the changes that will effect all UK investors from January 2013.

RDR – Keeping it too simple

The 6 page pdf booklet is the FSA RDR consumer guidance and is brief, frankly I’m left wondering how on earth something that appears to be so simple has cost the financial services industry millions to adapt and prepare for. In short, we have reverted back to a “not quite” polarised industry – with “restricted” advisers and “independent” advisers. The definitions of each are still far from clear. I would also argue that the issue of how advice is paid for has been really poorly handled, though this is in part due to the vast number of computer systems with different approaches to the same fundamental problems. My stance has always been to be clear about the charges that we apply and to have these on a fee basis, so that they can be agreed and are not open to manipulation by advisers or product providers. Sadly I do not believe that this document conveys the issues well enough, rather “downplaying” the significance. Most people will not be able to afford financial planning because this process was started too late and made the fundamental mistake of banning commission. This is not an issue for our clients, but it is for millions of people who have been under the impression that their adviser works for free and occassionally collects a bit of commission. The FSA are aware of this problem, hence the links to the Money Advice Service, which indicates the advent of the online DIY approach that most will believe to be the only option…after all we can’t trust the banks can we?

FSA RDR Consumer GuidanceDominic2023-12-01T12:22:42+00:00

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