The American writer Dorothea Brande once said: “The only difference between a problem and a solution is that people understand the solution.”
The financial services industry might want to keep that in mind as it hails the government’s plans for a tax-free pension advice allowance. The proposal, mooted earlier this year and now under consultation, is to let members of defined contribution schemes take £500 out of their pension pot to pay for advice.
It’s a simple idea, and a good one. Unfortunately, however, it’s not really a solution to anything.
The hope is that it will help bridge the gap between the number of people who need advice about their pension options and those who actually seek it. The received wisdom is that savers would take advice if only they could afford it. There’s some truth in that, but only so much.
Let’s be clear – decent financial advice is invaluable. It could be the best investment you’ll ever make. The problem is that most people don’t see it that way.
The advice industry can take its share of the blame for this, having done far too little to outline the benefits of taking financial advice. They have stats to back up their argument, from the tiny number of complaints to the ombudsman about advisers to various research showing how people have gained from taking advice. An Old Mutual Wealth study last year found that nine in ten people who see an adviser regularly said it benefited them.
Yet a survey by Retirement Advantage found that almost two-thirds of over-50s would be unlikely to take advantage of an advice allowance, while only 38 per cent said cost had been a deterrent to taking advice.
Cost isn’t the only reason people aren’t taking advice, so the solution isn’t simply to make it cheaper, or even free. Have you tried comparing advisers? The accepted wisdom in the industry is that you compare advisers by taking advantage of the free initial consultations that most offer.
Fine if you’re not very busy and you’re fully convinced of the need for advice. But if you’re pushed for time – as most of us are – and simply need advice on a specific issue, it’s not so good.
You’d probably want to be able to get an idea of the services offered and the fees charged without undertaking a tour of your local advisers – by looking on their websites, for instance. But a study of 500 IFA websites last year by consumer group Which? found that just 151 published their fees and charges online.
Advisers say their fee structures depend too much on individual circumstances to publish a list of charges. That’s not a good enough excuse. They could still publish “rule of thumb” figures to serve as a helpful guideline (such as those at www.unbiased.co.uk/cost-of-financial-advice-guide).
Here’s a rule of thumb for you – if an adviser website doesn’t provide an indication of its fees, count them out.
The advice allowance is a step in the right direction, but a flawed one. Restricting it to retirement advice misses both the point and an opportunity, while providers won’t be obliged to offer it.
But it’s a good chance to test whether the assumption that people will take professional advice if they can afford it is the correct one. I’m not sure it is; I reckon it’s more about demand than supply. We’ll soon find out.