System hinders advisers reaching the masses

John Lappin

What should investment advisers make of the speech made by Money Box presenter Paul Lewis to the Personal Finance Society’s dinner in Birmingham last week?

Many advisers will not have been enamoured to hear about their continued addiction to commission or their peddling of the risk-reward myth.

Nor will many – some of whom have signed up to the PFS’s pro bono initiative with Citizens Advice – be pleased to hear that they should be advising people with small investments and pension pots.

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Here was one killer quote: “Scrap risk appetite and fund selection and learn what the effective interest rate is on £40,000 worth of premium bonds. I also urge you to consider charging structures – these people will not need ongoing advice, so advisers should move to a simpler fee structure, such as an hourly rate.”

Now clearly many consumer journalists are driven at least in part by the size of their postbags. They are IFA-sceptics partly based on the evidence provided by readers and listeners. But the postbag won’t bulge with praise for advisers, even though the vast majority do a good job.

Certainly a fee-charging IFA community that advised all sizes of pots for a small fee would be hugely beneficial for the UK; it’s just that such a thing is probably unachievable.

Nor does this columnist agree with Mr Lewis’s views on risk-reward and even – used intelligently – active fund management.

Put simply, a huge number of people are underinvested, not overinvested, certainly in younger age groups. There may also be a cohort of older investors that rely on switching savings rates, and until a few years ago held a few reliable high street shares.

They may very well have been better off seeking a reward elsewhere, such as in a low-risk fund or two. Passive would be fine, of course.

That said, the really interesting debate comes next with the pension income reforms, which are clearly on Mr Lewis’s mind. Many people will remain invested in some form of mini drawdown, which will unlikely be advised. And many will run out of money.

Worse still may be property schemes and other interesting investment opportunities that will seek to attract pension cash. These products could lead to disastrous decisions.

Advisers, I would argue, simply cannot reach these customers under the current set-up. The reasons are twofold.

Firstly, the fees required would be too high. They are partly too high because of the cost of regulatory requirements, such as the compensation scheme etc.

Secondly, to really allow advisers to reach these customers requires at least some latitude from regulators on the subject of simplified, limited or focused advice.

That said, it may be that the jump to hourly fees is not as difficult as it was even four or five years ago. Certainly one adviser recently told me that he had lost only one client in the change. Yet I still think it would be a change too far for the advice market as a whole.