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)
· 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.
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.
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 email@example.com