Comment: Don’t know what you’ve got till it’s gone

FOR decades, there have been two constant mantras in the world of personal finance: the need for independent advice when planning, and for ever more financial education.

Bill Jamieson

These have been the solemnly intoned justification for the regulatory upheavals of recent years.

But instead, the number of independent financial advisers is in sharp decline. Regulation has now spawned a surge in do-it-yourself investors – and growing apprehension that we have a new crisis in the making.

As for financial education, it has proceeded in fits and bursts but with little evidence that it has had any lasting effect in raising young people’s understanding of money, credit, interest rates or simple savings .

According to the Financial Conduct Authority, the number of advisers has fallen sharply – from 41,000 two years ago to 32,690. An article in the Financial Times bemoaned this collapse, comparing the world of the disappearing IFAs to that of plumbers (107,000) and car mechanics (218,590). A chief reason for this decline has been a change of which the public was largely unaware: “RDR” or the Retail Distribution Review. The effect was to end the payment of IFAs by commissions from insurance companies and fund management groups and instead oblige them to charge clients directly for advice.

The case appeared compelling. The previous regime created an incentive for financial advisers to recommend the product that paid the highest commission, not necessarily the one that best met the needs of the client.

Introducing a change to protect consumers was one thing. Getting consumers to pay for the advice quite another. Many have baulked at the prospect of the upfront fee and have chosen either not to proceed with a purchase or to go it alone as DIY investors: a timebomb in the view of some.

Other factors have added to “the death of the IFA”: the explosion in regulatory paperwork even to undertake the sale of a relatively simple product such as an individual savings account, and the cost of insurance cover to meet mis-selling litigation. Products that might seem uncontroversial may turn out to have been inappropriate.

It is tempting for many private investors to think that they can manage on their own and save themselves costs of an IFA visit. There are certainly many “hobby” investors who have the time and enthusiasm to follow markets on a regular basis.

But there are many more who have neither the time nor expertise to ensure their savings are working to maximum effect – particularly when markets have been so volatile. And there is also much more to successful saving than the initial decisions on asset and product choice.

IFA work has all the characteristics of an iceberg – one-third is visible but there is the two-thirds underneath of risk assessment, market and client monitoring, maintaining proper records and keeping up with constant changes in regulation. All this requires time and commitment.

Arguably more important is the advice an IFA can provide on major change points in individual circumstances. A classic example was provided by our IFA of the year competition when, midway through, the contestants had to respond to a request by the notional couple to raise £100,000 from their long-term savings to buy a flat for their daughter at university.

The contestants – the winning Nicola Ellis of Sinclair Wood in particular – were able to provide a detailed assessment of all the hidden cost implications of the flat purchase and to provide more effective – and money-saving – solutions. This is where the benefits of advice can far outweigh any fees or charges. Tough though the world has become for IFAs, it was long predicted and few would dispute the need for changes that have worked to raise the professional standing and quality of IFA firms. The weak or change-resistant have been weeded out and the sector more likely in the longer term to attract new, younger and better qualified talent.

What finally of financial education, seen as an unqualified “good” but rarely tested for its efficacy? The behavioural economist Richard Thaler found that financial education courses, “had no discernible effects” on student understanding “just two years later”.

Money Week editor Merryn Somerset Webb pleads for simpler products and argues that “instead of going on about financial education, we would be better off teaching our children maths rather better, incorporating key concepts such as compound interest and the like into lessons … the real problem” is “the shocking command of basic maths … even among professional 30-somethings”.