The Bizarro World of UK Financial Advice

Imagine this for a second:

You’re in the upstairs bedroom putting your children to bed for the night. The wind is howling, rain lashes the windows. Just as your loved once start to fall asleep you feel the bed getting wet. Before you realise, the sheets are sodden. You quickly grab a towel and when your turn back you see water cascading from the ceiling.

The roof is leaking. Again.

What do you do?

After making sure your family and valuables are safe you call the local builder. They are reputable, a member of various trade bodies and they have great word of mouth. The next day they pop over to take a look at your home:

Sorry, can’t do this job.

What? Is it too complicated? Are you too busy? Do I need a specialist?

No the work is fine. But you live in a terrace house. I only do work on detached houses.

Welcome to the bizarro world of UK Financial Advice

That, of course, is ridiculous. No builder would ever say that. But for financial advice, many Independent Financial Advisers (IFAs) often explicitly say that upfront.

“Minimum wealth (income/assets) – £100,000”

“Minimum mortgage value – £250,000”
“Minimum pension value – £100,000”
– Just three random examples from unbiased.com, a search engine for IFAs, accountants and lawyers

The Advice Gap

Unless you already have significant savings it’s very difficult to find an IFA who can help you. Even when you find one that can help, if you have a small pot, the charges can end up being such a large proportion that it makes getting advice unaffordable. That’s because it costs those IFAs more money to advise you than they could realistically charge:

Upfront fees varied considerably… For a pension pot worth £150,000, the average cost was £2,383, or around 1.6% of the total pension, and the highest amount quoted an eye-watering £4,500.

From Which?: https://www.which.co.uk/news/2018/08/revealed-the-cost-of-taking-professional-financial-advice/

If your pension pot is £30,000, a potential fee of £3,000 (10%) is just insurmountable. It’ll be very difficult to make back that upfront shortfall. Those costs are part of the reason why 94% of retirees don’t get advice on their pension transfers. This is the Advice Gap. The people who need proper financial advice the most, those starting or without the knowledge to make informed decisions, cannot affordably access it. This isn’t the fault of IFAs, almost all are hard-working experts who care deeply about helping people with their finances. And this is not new. The Financial Conduct Authority, the regulator, has known about this for over half a decade. There’s been market reviews, analyses and inquiries. But we still don’t seem any closer to closing the gap.

Back to the builder

Stunned by your builders’ reaction you are left with two options. You can speak to a friend of a friend, newly retired, who once upon a time did some labouring. They’d be able to patch it up for you. Or you could go against your gut and call Dodgy McDodgeface Builders. You know they are cowboys, but you are desperate – the roof needs fixing.

Either way, in a year’s time your roof is leaking again.

The sharks

At least for financial guidance, there are free resources out there like the Money Advice Service (MAs), The Pensions Advice Service (TPAS), Pension Wise and, if you’re being incredibly generous, websites like this one… But none of those places can tell you specifically what to do. They can only take you so far due to regulations. This chiefly came about from the Retail Distribution Review (RDR) over a decade ago. The FCA tightened up who and how advice could be given and effectively banned commissions on selling most financial products. The idea was to stop sharp practices, improve customer service and increase transparency.

Like many things, it was well-intentioned but poorly executed.

The result is the drawbridge to advice has been pulled up on the needy. People turn to friends of friends. Bookkeepers, accountants, lawyers. Or even those who have a passing interest in finance. I should know, I’m one of those guys.

The other route is much worse. Desperate customers, at a loss, try to swim the moat. Where the sharks are circling.

The British Steel Pension Scheme. Pensions Liberation. Cold-calling scams. The list is endless. This is not new. It’s been going on for years. It’s like whack-a-mole.

What can we do about it?

Unfortunately, there’s no Martin Lewis for personal finance. That’s because, in my view, there’s still a lot of doubt over where the boundary between advice (regulated) and guidance (not regulated) lies.

There’s no government minister whose specific brief is to act for the customers of financial advice. The closest we have is the Parliamentary Under Secretary of State for Pensions and Financial Inclusion who has incredibly broad role encompassing state pensions, private pensions, the Pensions Regulator through to financial guidance.

There’s the Financial Ombudsman and the Pensions Ombudsman. But by the time it’s got to those bodies it’s often too late. And that’s if you were ‘advised’ by somebody that was appropriately authorised.

We need the political will to help those who need it, not those who ask for it. Until then the silent majority hiding in the abyss of the advice gap.

 

All the best,

Young FI Guy


Reminder! FI London meet up Friday 19 October from 5.30pm onwards in The Old Bank of England pub, Fleet Street. More details on The Escape Artist’s website.

Comments

  1. Excellent article yet again YFG!

    Although, with this one, I was left feeling – “what do I do then?”

    As you said, we need political will, but – what should those people do whilst they wait for it? I’m sure reading your blog is a good start 🙂

    1. Hi Savings Ninja, I’ve been enjoying your blog (almost tempting me to try out matched betting, almost!)

      Tough question. If you’re reading this blog then you are probably interested in saving and investing. A lot of people aren’t though. Many just want to be told what to do and not worry about it. Back in the days when DB schemes were plentiful lots of people could do just that. The question of ‘engagement’ is a huge question. Worthy of many posts of its own!

  2. Hi YFG, a great topic to cover and one very close to my heart. As someone who has been investing for years I get asked all the time by friends, family and people with tenuous links (mum’s friend’s daughter) about how they should invest and specific advice on what they should do.

    I generally guide them to Monevator or explain the different products and what ISAs etc are but am very careful not to say anything specific as I don’t want loads of phone calls during the next crash.

    I’m not sure they are the answer but I do think Robo Advisors may step into this role for Millenials at least as people become used to trusting technology.

    Time to write to our local MPs and demand some action.

    1. Thanks CS. I think there is some scope for Robo Advisors – I am a little concerned about them when it comes to costs and investment suitability. Very much a wait and see.

      As I wrote a few weeks back, I wrote a submission to the Work and Pensions inquiry on pension costs and transparency. The committee has done a lot of good work in the pensions space and a good advocate for savers. Hopefully, there will be some positive action off the back of the inquiry.

  3. A potential problem with the Robo advisers is that whilst they have reasonable costs , a diverse range of low cost ETFs underlying their portfolios, they tend to have an active bias towards regional allocations that are quite polarised on occasisons.

    The difference between this and a typical managed balance fund is very slight and for the investing novice something akin to one of the Vanguard Life Strategy Funds would be a sensible choice, with an explanation and encouragement to avoid market timing , regular investing and warning that markets may be volatile but tend to work out In the long run.

  4. It’s my contention that you need to educate yourself and financial education is very very important. You shouldn’t need to – but it’s the world we live in.
    You can learn through trial and error. It takes time and effort but it will (literally) pay off.

    If you can master personal finance, the marginal gains once compounded add up to years (of freedom!). When you trade your time for money, mastering personal finance is the only route to freedom.

    1. I agree that financial education is very important. But realistically, the majority of people are not interested in investing, pensions, finances. And they never will be. I’d very much like to see more and better financial education in schools.

  5. I’m would guess that you’ve never done any building work? You analogy is exactly right – and yes, the large and even small companies won’t do small odd-jobs. You have to call in a handyman, or a specialist for the work you want to do.

    Why? Because as you point out the larger firms only want a decent project that make up a decent in their annual profit targets. Even the one-man band I hired only did major extensions/ renovation work, so he wouldn’t spend all his time quoting for work and more time practicing his trade.

    Bigger finances are more complex and the expertise is required even for a professional accountant. Either you have US share options that are subject to a double tax treaty, or you’re trying to divest some of your stake in a business while minimizing capital gains. These aren’t problems that the average Joe on the street faces – but they are problems that require in-depth knowledge of the relevant legislation.

    The lesser stuff *should* be able to be self-taught, and as you point out things like the MAS fill the gap as best they can. It’s just not profitable being the ‘handyman of finance’, plus the legal grey area and the frustration of explaining why stocks may be riskier, they are good for the long term for the 1000th time.

    Storm in a teacup in my view.

    1. I agree with your analysis on the larger firms and how restricting their offering makes sense for them financially. That said, self-teaching is a poor substitute for professional financial advice. Often those who need it most are not in a position to teach themselves. To use an analogy, it would be inappropriate to tell someone who needed basic legal advice to go and learn the law themselves (even if their question was not ‘worth the hassle’).

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