Advice for the masses

In the good old days (around November last year) the true cost of advice was masked by hidden commissions and provider subsidies, but that is no longer the case. Adviser charges and fees are now open to full public scrutiny and the fact is that many clients do not like, or cannot afford, the costs.

This is not the fault, in the main, of advisers. In many ways hidden commissions in the past allowed them to reach people who could not normally have afforded financial advice – perhaps one of the few real benefits of the indemnity commission system – but also a system that made financial advice affordable to a wider audience and attracted clients who could not normally have afforded to pay fees. A market distortion, if you like.

The fact is, however, that providing one-to-one services of any kind will always be expensive. Ask any dentist or GP. Financial advisers know this too. When a client meets up with a financial adviser, wealth manager or financial planner he is not just paying for an hour of your time, he is paying for 10, 20, or 30 years of professional experience and that is an expensive commodity.

Providing one-to-one services of any kind will always be expensive.

This cost ‘barrier’ to using a financial adviser will not change without a radical rethink, not just by the adviser community but also by the regulator.

I was a little concerned recently to learn that the regulator may be turning its attention to the apparent similarity between pre-RDR commission earnings and post-RDR fees. Of course it is right for the regulator to shine its spotlight where it sees fit, and there is no suggestion of wrongdoing, but I question whether the regulator really understands the economics of small businesses.

The fact is that if it took a certain amount of money to run an IFA firm last year it will take a similar amount this year and those costs have to be funded. Intermediaries need to generate sufficient revenue to pay their bills and see a reasonable profit.

That is not rocket science or smoke and mirrors; it is just basic economics.

While it has not been analysed well, I suspect there was considerable shock among many advisers’ clients when they were told that the advice they had previously believed was ‘free’ (but was actually paid for by product commissions) was no longer ‘free’ and they would have to pay for it. I have not seen many studies look at how many consumers decided, as a result, to drop their adviser and ‘self invest’, to use the new parlance, but I have no doubt it was quite a few. And good luck to them; many will do fine as long as they have a good grasp of asset allocation, efficient portfolio management and long-term tax planning. It is perhaps similar to patients of a dentist deciding to pull out their own teeth to save money; you could but would you want to?

Even so, it is a great shame that more people cannot afford financial advice. This may change as people realise that good advice is worth paying for but in the meantime many are left in limbo.

Financial advisers typically charge anywhere from £80 to £200 an hour and a good, comprehensive financial plan can easily cost £2500 to £5000 – beyond the reach of millions. One solution is for a ‘cut down’ financial advice service for the masses. Bringing the cost of a simple financial plan down to hundreds rather than thousands of pounds and millions could be served, not tens of thousands.

For this to happen new and cheaper forms of advice need to be offered and the US experience, where the much more crowded financial planning market is creating new, more affordable options, is heartening. There is also anecdotal evidence that a number of UK planners and advisers are waking up to the potential.

Cofunds released a study earlier this month suggesting that 58 per cent of advisers were using online tools to service clients with modest portfolios to help keep costs down. These include online tools for speeding up the factfind process, email updates, client-facing websites where clients can view their financial plan and its progress, text messages, Twitter and so on.

Online technology is the advisers’ friend in this respect and could indeed come to their rescue.

It would be a move in the wrong direction if advisers were ever to cut out face-to-face contact completely (there is nothing like seeing the whites of the clients’ eyes) but in economic terms it is undoubtedly the case that abbreviated, simpler, low-cost advice is far better than no advice at all.

Kevin O’Donnell is a financial writer and journalist

Fundador in response to Gill Cardy’s column on investment risk (FA, 15 August)

This is where the regulators have together brought us: to a place where the investment market is little better than a casino run by central banks. Which will you have sir/madam: guaranteed losses from financially-repressed sovereign bonds, or hyper-volatility from blue-chip equities? For you HNW individuals, how about some tax-efficient VCTs? If by some miracle you have managed to save for your retirement, what about a lottery annuity, where you will be lucky to to get money back, but if you live long enough you might, just might, do better than break-even?