Ever since the government freed up the rules governing savers’ access to pension pots, I feared the foundations for the next great mis-selling scandal had been laid. The seeds are set to germinate in the crevice between “guidance” and “advice” – and from the outset many will be confused by the difference between the two.
“Guidance” is a basic overview offered by the Pension Wise service. “Advice” is a much more detailed service, based on an assessment of the individual’s circumstances, requirements and attitudes to risk. But this advice comes at a cost depending on the time put in by the adviser in “know your client” research and setting out suitable investment options.
It’s not hard to visualise what could soon unfold. Millions of savers, repelled by the fees they might face, opt for the minimum “guidance” from Pension Wise, decide to back their own hunches – and hope for the best.
Alternatively, even with proper independent advice, prospective retirees will be tempted to draw down a lump sum for the dream Spanish villa. They discover too late that their remaining pension savings are not growing as fast as they had hoped or that the investment advice had been overtaken by events. Clearly the IFA was at fault! Before long, a new mis-selling scandal is unfolding as the litigation queues form to sue the advisers.
Faced with this prospect the Treasury and the City watchdog the Financial Conduct Authority (FCA) have just launched a major review to assess the “advice gap” and lack of access and affordability of financial advice, particularly for the less wealthy. Problems over the “advice gap” are by no means new. Previous changes on the provision of financial advice – and how clients should be charged – were brought in by the Retail Distribution Review. This banned commission charges, obliging advisers to charge fees instead, brought in “Know Your Client” obligations and higher qualification standards.
The immediate problem, of course, was that only the IFA’s more wealthy clients would be willing to pay the fees and that less well-heeled clients with smaller portfolios would opt to dispense with independent advice, exposing them to investment errors.
The objective of the review is laudable enough – to ensure everyone takes advice when they need it and that it is affordable. But IFAs are not convinced that this is easily achievable. And not unsurprisingly, IFAs themselves have come in for angry criticism on online blogs. The fees are often described as unfair and extortionate, with clients being charged individually for the cost of regulatory compliance and investment advice that is applicable to many others. I do not doubt there are IFAs who take unfair advantage and overcharge clients. But they are now obliged by regulation to have a comprehensive knowledge of their clients’ affairs and circumstances, to be up to speed with tax changes, actual and prospective, to be aware of new investment products and services and to have some working knowledge of the legal framework around wills and inheritance planning. This in turn can often require separate specialist advice from a tax or estate lawyer.
IFAs are reliant on clients giving clear and unambiguous descriptions of their attitude to risk. This is not straightforward. Attitudes can and do change over time and circumstance.
In a world where the biggest threat to investment planning is the emergence of financial bubbles and the unpredictable timing of their bursting, investment circumstances can change suddenly and beyond recognition from that detailed interrogatory session with the IFA a year or so ago. Comprehensive professional indemnity cover must now extend to events that may impact on pension portfolios years after the advice was given.
We are constantly warned of the danger of herd-like investment decision-making and a wave of money going into the same vehicles that happened to be fashionable. Little wonder it might seem much of that expensive advice results in cautious, defensive-driven portfolios of similar funds and trusts, with lookalike asset diversification charts and similar weightings in the various sectors. It is difficult for investment advisers to stray much beyond the prevailing consensus. And in any event, is that what clients wish?
Arguably the most important requirement is for the investor to “know thyself”: the beliefs and attitudes that govern their behaviour. And when it comes to looking after that pension nest egg, the priority for the vast majority is capital protection. Good investment advice can provide the basis for educated decisions and an investment stance that is more resilient to market fluctuations.