End of Free Financial Advice

Credit-Crunched

What are your thoughts on RDR, I appreciate that multi tied advisors are not particuluary well though of on this forum, however I do feel that they have a place, for simple decreasing term life policies, smaller investments etc.

However these major banks have now dropped out of MT recently in the news:
-barclays
-HSBC
-Co-Operative

Do you think that fee only advice is bad for the general public, albeit advisers of a higher level of (theoretical knowledge)?

Will your average Joe pay to set up a life policy, I know they can do it for free themselves, however some of the questions on this forum show the distinct lack of basic knowledge that this country possesses...
Your thoughts?

dunstonh

Financial advice has never been free.

Do you think that fee only advice is bad for the general public, albeit advisers of a higher level of (theoretical knowledge)?

No. Fee option is cheaper than commission for medium sized and larger transactions. it was only the bottom end of the market where commission was cheaper.

The fee will also still be allowed to be collected via the product. Also, for investment business, its been largely fee basis for a number of years now in that the commission was explicitly charged against the investment as a fee. So, in that respect it will cost no more and for those greedy firms that tried to hide their higher "fees", they wont be able to any more as the fee agreement will be signed by the client stating exactly what the fee is. You cant see many people signing a fee agreement for large amounts.

Will your average Joe pay to set up a life policy, I know they can do it for free themselves, however some of the questions on this forum show the distinct lack of basic knowledge that this country possesses...
Your thoughts?

Insurance is not included in RDR and will still be arranged on commission basis (as will mortgages).

Credit-Crunched

dunstonh wrote: »

Financial advice has never been free.



No. Fee option is cheaper than commission for medium sized and larger transactions. it was only the bottom end of the market where commission was cheaper.



Insurance is not included in RDR and will still be arranged on commission basis (as will mortgages).

My point was referring to the bottom end of the market not the medium to higher end transactions.

Also I understand that insurance is not included in the RDR review, however with banks laying off their MT workforce, there will be no one left to provide advice, regardless if its under review or not as most branch based mortgage managers refer the protection to a financial advisor

dunstonh

My point was referring to the bottom end of the market not the medium to higher end transactions.

In the "old days" you had the insurance agent catering for the bottom end of the market. Problem was that they were not content with catering for that market any more and started moving to the middle market and in some cases the higher end whilst the products were still priced for the small premiums. This meant big premiums resulted in big commissions and the products for the lower end were often unsuitable for the higher end.

So, no solution will be perfect.

Also I understand that insurance is not included in the RDR review, however with banks laying off their MT workforce, there will be no one left to provide advice, regardless if its under review or not as most branch based mortgage managers refer the protection to a financial advisor

Banks handle a minority of the transactions. IFAs dominate the advice arena in most areas. However, the banks and insurance agents have far more complaints. So, if some banks and tied salesforces decide to pull out, then there is plenty of scope within those remaining to give quality advice.

That said, because of ever increasing rules and regulation, some of which is starting to get a bit silly, the amount of administration involved in doing a transaction is going to price some people out. e.g. a 10 minute conversation about something requiring 5 minutes admin to actually do the task can require up to 30 minutes documentation and in some cases a formal report issued. The more work involved in transactions, the less likely advisers will want to deal with small cases where the servicing remuneration wont cover it and an explicit fee wont be justifiable (for the client as the fee will be the same regardless of amounts)

Loughton_Monkey

Credit-Crunched wrote: »

Do you think that fee only advice is bad for the general public, albeit advisers of a higher level of (theoretical knowledge)?

Your thoughts?

This is a can of worms, and I tend to think that increased legislation/regulation can complicate rather than make things 'better'.

We have, in this country, a specific problem of [simplistically] poor education, coupled with the ultimate in 'Nanny State-ism' - a dangerous cocktail.

Look, first, at the absolutely huge proportion of the population who (a) have no concept whatsoever of saving money, and (b) even when they do, cannot understand the 'offerings' of simple savings accounts offered online or on the High Street. For this segment of the population, one has to wonder if anything will cure the problems.

Now move up the scale to the more educated people with (a) a bit of money, and (b) some common sense. Here, the problem really is one of perception. There is a general feeling that 'advice' is all about superior performance - not quite 'get rich quick' - but almost.

For example, why is it that when people go to a solicitor for conveyancing, they understand that he simply secures the transfer of the house in a legal matter. He does not advise (let alone guarantee) that you are buying the house at a good price, or that the house will hold its value/increase better than others, or that you are not moving to an area with neighbours from hell.... When you go to an accountant to set up your company to sell widgets over e-bay. He will do just that. He does not advise or guarantee whether it's a good idea to sell widgets or suggest you should be selling bicycles. He has no 'blame' if you do not make a profit.

However, we seem to have a situation where you go to the IFA for a pension, and expect that if you can't, then, afford to retire 20 years later, you have been 'mis-sold'......

As one goes through one's 'financial life' there is a distinct need for continually operating a good 'strategy'. i.e. understanding if/when buying your own house might be 'good'. Whether you should be using a pension and if so how much to put in. Whether to use ISA's. What to put into your wife's name/taxation. How much to keep in cash savings.......

This is where I believe an IFA - charging a fee - can be invaluable for people who 'struggle' with financial matters. Just as I am not an accountant and so if I owned lots of companies and was quite rich, I might use an accountant to advise me on how to structure them, how to pay myself (salary or directors fees).....

But ultimately the knowledge [whether from an IFA or your own knowledge] eventually requires you to buy a product. If we know what we want, why can't we all just do our own research and buy it? Some people shop carefully. Some don't. Ironically, the biggest investment most of us make (house) seems never to be done using an 'advisor' - as in "Tell me the 'best' house I can get for £400K in Basingstoke....". We all do our own research - visit the house - and live or die by our own decision. No-one to blame if you paid £10K over the odds.

For reasons I don't fully understand, we currently don't have a market in which a sophisticated 'Joe Public' can buy a product at 'rock-bottom' price. If Jupiter are 'happy' to sell their UK small sludge and slurry accumulation fund at 1.00% TER, but more usually sell it through an intermediary at 1.50% and the intermediary swallows up 0.5% for 'advice' - then why can't I buy it for 1.20% on an 'execution basis' with a non-value-added intermediary providing the platform for a lucrative 0.20% margin? Or alternatively, why don't [can't?] Jupiter sell it directly to you for 1% or 1.2%?

atypical

Credit-Crunched wrote: »

However these major banks have now dropped out of MT recently in the news:
-barclays
-HSBC
-Co-Operative

Interestingly, Lloyds Banking Group sees the RDR as an opportunity rather than a threat. With everyone else pulling out, they hope to fill the gap with Scottish Widows products. I think the target is something like a 50% increase in customers taking products.

Credit-Crunched

Loughton_Monkey wrote: »

This is a can of worms, and I tend to think that increased legislation/regulation can complicate rather than make things 'better'.

We have, in this country, a specific problem of [simplistically] poor education, coupled with the ultimate in 'Nanny State-ism' - a dangerous cocktail.

Look, first, at the absolutely huge proportion of the population who (a) have no concept whatsoever of saving money, and (b) even when they do, cannot understand the 'offerings' of simple savings accounts offered online or on the High Street. For this segment of the population, one has to wonder if anything will cure the problems.

Now move up the scale to the more educated people with (a) a bit of money, and (b) some common sense. Here, the problem really is one of perception. There is a general feeling that 'advice' is all about superior performance - not quite 'get rich quick' - but almost.

For example, why is it that when people go to a solicitor for conveyancing, they understand that he simply secures the transfer of the house in a legal matter. He does not advise (let alone guarantee) that you are buying the house at a good price, or that the house will hold its value/increase better than others, or that you are not moving to an area with neighbours from hell.... When you go to an accountant to set up your company to sell widgets over e-bay. He will do just that. He does not advise or guarantee whether it's a good idea to sell widgets or suggest you should be selling bicycles. He has no 'blame' if you do not make a profit.

However, we seem to have a situation where you go to the IFA for a pension, and expect that if you can't, then, afford to retire 20 years later, you have been 'mis-sold'......

As one goes through one's 'financial life' there is a distinct need for continually operating a good 'strategy'. i.e. understanding if/when buying your own house might be 'good'. Whether you should be using a pension and if so how much to put in. Whether to use ISA's. What to put into your wife's name/taxation. How much to keep in cash savings.......

This is where I believe an IFA - charging a fee - can be invaluable for people who 'struggle' with financial matters. Just as I am not an accountant and so if I owned lots of companies and was quite rich, I might use an accountant to advise me on how to structure them, how to pay myself (salary or directors fees).....

But ultimately the knowledge [whether from an IFA or your own knowledge] eventually requires you to buy a product. If we know what we want, why can't we all just do our own research and buy it? Some people shop carefully. Some don't. Ironically, the biggest investment most of us make (house) seems never to be done using an 'advisor' - as in "Tell me the 'best' house I can get for £400K in Basingstoke....". We all do our own research - visit the house - and live or die by our own decision. No-one to blame if you paid £10K over the odds.

For reasons I don't fully understand, we currently don't have a market in which a sophisticated 'Joe Public' can buy a product at 'rock-bottom' price. If Jupiter are 'happy' to sell their UK small sludge and slurry accumulation fund at 1.00% TER, but more usually sell it through an intermediary at 1.50% and the intermediary swallows up 0.5% for 'advice' - then why can't I buy it for 1.20% on an 'execution basis' with a non-value-added intermediary providing the platform for a lucrative 0.20% margin? Or alternatively, why don't [can't?] Jupiter sell it directly to you for 1% or 1.2%?

Excellent post, are you and dunstoh the only brains on this forum! Usually full of bank bashing nonsense, then come on here to ask for help on the 'best' thing to do with their money!

Imagine the FSA regulation of any other industry....

I bought this BMW for 14k at no point did you tell me that it would be worth 7k in two years, or that the mpg was less than 33 therefor i will sue you for mis selling and get the depreciation of my car back and compo for the extra fuel used!

Porcupine

I think there are a few things in action here:

1. British (English?) people aren't good at talking about money. It tends to smack of Harry Enfield's "and I'm considerably richer than you". So picking up tips from other people like you would with buying property or running a business tends not to happen. Similarly children tend not to pick these things up whereas, say, by having a paper round you get to experience a bit of how business works.

2. Investments tend not to scale very well down to the lower level that the beginner sees. If you have a paper round and earn £5 a week, you can put it in your 5% kids savings account and you get £12.50 a year interest. Having a 'grown up' savings account is just the same, only with more money (you hope). But you can't invest til you're 18, and then you need minimum £50 a month, and even then you can only buy one fund. You can't really get a sensible portfolio until you're paying (say) £200 a month, which not many young-ish people on low salaries can afford. And an IFA is unlikely to be cost effective until you have £50K+, which means it probably waits until you're 35-40.

3. At some point before they're 40, many people buy houses. So their nice big pot of cash disappears, and a frenzy of paying the mortgage starts. They may have a pension fund, but that tends to be complicated because each employer has their own variations so getting advice isn't so easy.

4. People tend to stick with the status quo until upset (eg changing jobs). If they don't have any major upsets in 10 years, their investment planning may not evolve either.

5. We aren't good at assessing risk, and making decisions probabilistically. For example, I could buy a £20 fixed-train ticket or a £50 flexible ticket. People typically buy the flexible ticket if they don't know for sure when they're travelling. But I could buy the £20 ticket, and as long as the chance I could catch the fixed train was greater than 40% the odds would be in my favour (assuming I could afford to lose the extra £20). Most people don't do those sorts of calculations. Furthermore investment risk is hard to quantify: what is the numerical probability of fund X losing 20% over the next 5 years, and what are the error bars on that number? I'd really love to get my hands on that sort of data.

6. People tend to be either optimists or pessimists. Neither worldview is particularly helpful when making probabilistic decisions.

7. The investment industry doesn't exactly go out of its way to make things clear. They're all too interested at selling their own particular product to engage in general education.

8. Comparing those products is really hard, even for the numerate. Witness the endless tracker v managed funds debates. Savings accounts are easy: best buy table, sorted. Do we consider past performance (but we're always told not to), performance compared with the benchmark, fees, risk (how do we measure that?), volatility, asset allocation, managers, the brand name stuck on the front?

9. Doing your own research (even if you're numerate and have the skills) can be very time consuming. It might not be cost effective for your £100/month.

10. Investing is counterintuitive: the thing that did well last year could be a strong performer, or it could be overpriced. You want to buy a strong performer that's cheap due to having a short run of bad luck - but how do you know it's not just a lame duck? How do you know if something's peaked, or will continue to grow?


So, all in all, I think investment education is going to be an uphill battle.

MoneySaverLog

Any advice given by the banks needs to be taken with a pinch of salt, as recently evidenced by Panarama.

Porcupine

Loughton_Monkey wrote: »

For reasons I don't fully understand, we currently don't have a market in which a sophisticated 'Joe Public' can buy a product at 'rock-bottom' price. If Jupiter are 'happy' to sell their UK small sludge and slurry accumulation fund at 1.00% TER, but more usually sell it through an intermediary at 1.50% and the intermediary swallows up 0.5% for 'advice' - then why can't I buy it for 1.20% on an 'execution basis' with a non-value-added intermediary providing the platform for a lucrative 0.20% margin? Or alternatively, why don't [can't?] Jupiter sell it directly to you for 1% or 1.2%?

You can... some intermediaries rebate (some of) the trail commission: see this list.

Though what surprises me is that they don't keep the 'institutional' funds for the bulk holding. For example, a randomly selected UT has an A unit with a TER of 1.9% and a Z unit with a TER of 0.21%. The Z unit has a minimum purchase of £1m. But the platform holds billions of pounds worth of assets which tend to move quite slowly: why can't the bulk of the assets be held in the Z unit, with the amount needed for short-term trading be the A unit?

dunstonh

MoneySaverLog wrote: »

Any advice given by the banks needs to be taken with a pinch of salt, as recently evidenced by Panarama.

You are right that banks should be avoided but not because of Panorama. That programme was a complete farce and completely missed the issues. Remember that the programme found no wrong doing. The "experts" also looked at it from an independent viewpoint and ignored the fact that the banks are tied agents. Yes, one bank person came across as a trainee and another was a bit slimey but some of the things they were criticised on were harsh and smacked of desperation on the part of the programme makers to find something wrong.