DO-IT-YOURSELF investing is booming as consumers rejected by banks and financial advisers take matters into their own hands – and the risks that come with doing so.
New rules that came into force in January have driven thousands of financial advisers out of the industry and forced others to turn their backs on clients they don’t consider sufficiently affluent. High street banks have responded to the reforms too, either by closing their advice arms or imposing high minimum investment levels.
So as investors prepare to use their new annual individual savings account (Isa) allowance, a growing number will be doing so without taking advice.
It’s all because of reforms that took effect on 31 December under the retail distribution review (RDR), which were aimed at improving financial advice standards. The biggest measure was a ban on commission payments from investment providers to financial advisers for selling their products, in a bid to stamp out mis-selling. It has been replaced with adviser charging, a fee agreed upfront between adviser and client (although it can still be taken from the investment).
There are also new, higher qualification standards for advisers wanting to remain fully independent.
The changes have forced thousands of advisers out of the industry altogether, while many of those remaining will no longer serve clients without at least £50,000 to invest. The number of bank advisers has plunged 44 per cent since the end of 2011, according to the City regulator, while IFA numbers are down by almost a quarter.
More than half a million people in Scotland alone have been made advice “orphans” by the reforms, according to research by Deloitte.
The big banks were expected to fill the void, sparking fears of a new mis-selling explosion. But they have also closed their doors to ordinary investors, citing increased costs arising from the RDR. Some, including Bank of Scotland, will offer advice services only to those with £100,000 or more to invest.
Others, including Santander, Barclays and Clydesdale Bank, have shut down their branch-based advice operations entirely.
David Thomson, chief investment officer at VWM Wealth Management in Glasgow, said: “Banks either had to gear up or get out, and with plenty on their plates following the financial crisis, many have decided to concentrate their efforts elsewhere.
“The problem for the public is that the advisers and planners remaining in the industry are now able to pick and choose their clients as never before, which means people are left fending for themselves.”
So where does that leave the average pension saver with modest sums to invest? Some IFA firms have launched “execution-only” services – on which commission can still be paid – where they carry out the instructions of clients but don’t give advice.
But the big winners from the RDR are likely to be online fund platforms and supermarkets.
These services give “execution-only” or “guidance-based” access to investment products, with no actual advice offered.
There is some disquiet over the way they operate, with claims that they promote funds in a way that blurs the boundaries between advice, guidance and information. Most have preferred funds or “best of” lists, without always making it clear whether they get commission from those providers. Such fund selections can seem like recommendations rather than promotions, particularly where investors are guided to choose from those featured.
“Some of these firms provide dealing and custody services at a price and will suggest investments that they believe are good,” said Thomson. “However, they don’t look at the bigger picture and will never know your full financial situation, which should have a bearing on their recommendations.”
The most obvious risk is that without advice investors are in danger of making potentially expensive mistakes.
“There is such a proliferation of products these days and it is all too easy to make a mistake or overlook something important,” said Thomson.
The risk is magnified by the fact that those who make investment decisions without advice can’t file a complaint or seek compensation in the event of things turning sour, unless it wasn’t made sufficiently clear that the service used was execution-only.
Keep that in mind, however, and there are plenty of advantages to using DIY investment websites if you’re comfortable making your own investment decisions.
Derek Stewart, managing director of Glasgow-based Sam Wealth, recommends using only those online services with strong reputations and websites that are more educational than sales-oriented.
“My other criteria would be that they have been in business for at least five years, or if new the people behind it have a good track record; that they can access the funds at the best prices due to the bulk business they transact; that there’s no initial charges; and that the annual management charges are competitive.”
Annual charges are typically around 0.5 per cent of the amount invested, although trading charges can pile up if you make frequent fund or share switches.
The best known platform is Hargreaves Lansdown (www.hl.com), which has around 450,000 DIY investors. It offers access to thousands of unit trusts, trackers, investment trusts, shares, exchange traded funds and other forms of investments.
Other well-established firms offering similar services include Interactive Investor (www.iii.co.uk), Alliance Trust Savings (www.alliancetrustsavings.co.uk), Bestinvest (www.bestinvest.co.uk) and Fidelity FundsNetwork (www.fidelity.co.uk).
The sheer range of services and investment options available through these websites can be daunting; there are more than 2,240 investment funds available in the UK (excluding pension, life and offshore vehicles) and several ways to buy them, not least through Isa and self-invested personal pensions.
So where do you start if you’re new to the DIY way of investing? Barry O’Neill, investment director at Carbon Financial Partners, offers a pointer. “Have a clear idea of your financial objectives. If you are investing make sure you keep costs as low as possible and only put money into riskier assets if you need to generate higher returns. And avoid anything that seems too good to be true,” he said.