Advice or guidance? That's the key question

Experts say a new website intended to help people to make crucial financial decisions may be misleading them. Simon Read reports
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The Independent Online

A new government advice service launched last week has been criticised for misleading people and potentially putting them into the wrong kind of investment or pension. Critics says the online Money Advice Service is too generic to be of any real benefit to people desperately looking for help with financial decisions.

"Using the word 'advice' is both confusing and misleading," says Martin Bamford, managing director of the independent financial planners Informed Choice. "What they have to offer is guidance, not advice."

Philippa Gee, managing director of Philippa Gee Wealth Management, makes much the same point. "The problem is the word 'advice', which the website simply isn't in a position to provide. It's a bit obvious to say it, but is the website clear, fair and not misleading? It would have a much stronger case if the word 'advice' was just changed to 'guidance'."

The problem, according to these advisers, is that anyone going to the site to get advice is going to end up short-changed. But the worry is that because the government-backed service has had millions spent on it, it could end up being the only route offered to the millions of people desperate for help with their finances.

An expensive television campaign is already airing, with the advert including the line "Our advice is independent and unbiased. Oh, and it's free. How is that for a breath of fresh air?" Anyone seeing the ad would assume they are going to get free independent advice. What they actually get is an online financial health check which then points them towards the types of products that might be suitable for them.

The danger is that they may then contact companies which offer the products and simply go ahead and sign up. But in the process anyone could choose the wrong option and, as they haven't actually been given any advice, won't have any recourse.

"The danger with the Government's advice website is consumers won't understand that the advice is unregulated, leaving them without a leg to stand on if they make the wrong choice," points out Charlie Thomas, executive editor of the specialist magazine Pensions Management.

The cost of the service this year is £43.7m, which is paid for by an annual levy on the financial services industry. That in itself rankles with Martin Bamford. "The service definitely isn't 'free' as it costs the sector £43.7m to fund it. In fact, I received my FSA invoice this week, which included a cost of £1,135.53 for the Money Advice Service!"

None of the experts is critical of the site itself, which they say could offer a good starting point for many.

"The Money Advice Service could be a useful source of information for some individuals," says Adrian Lowcock, senior investment adviser at Bestinvest, but adds: "I think it is very important they explain exactly what it is they are offering."

It's worth pointing out that there are some advisers who may be worried that they may lose the commissions they make from those who choose free guidance from the Government website rather than paying a professional adviser for help. The advice industry does make a lot of money.

According to Danny Cox, of the Bristol advisers Hargreaves Lansdown, typically initial advice fees are 1 per cent to 3 per cent of the amount invested. Commissions take an even bigger chunk of cash out of an investor's pot – they can be as high as 6 per cent.

On top of that, annual fees for reviews are usually between 0.5 per cent and 1 per cent per annum. Such figures make it easy to understand why millions could be tempted by the Government's offer of free financial advice.

But that's missing the added value good advice can mean, as well as the fact that legitimate advisers are regulated, giving people the right to claim compensation if they are given the wrong advice.

Charlie Thomas believes that expert advice is often crucial. "Pensions and annuities are too complicated to consider without expert advice," she says. "Annuities in particular are enormously complex because most people don't conform to a certain type."

If you buy the wrong annuity – which gives you an income in retirement – you could end up tens of thousands of pounds out of pocket, warns Stephen Lowe of Just Retirement. That's particularly true if you qualify for an enhanced annuity, which pays out a much higher rate to those who may have a lower life expectancy.

"Our research shows that the number of people that could qualify for an enhanced annuity is around 60 per cent, yet out of all annuities bought in 2010, only 20 per cent of people attained an enhanced annuity," Lowe points out.

But the more people use generic "advice" sites, the greater the risk that they will lose out. Research by Oxford Economics suggests that last year, up to £7bn-worth of additional retirement income was lost by people not exploring their enhanced annuity option.

It's also worth pointing out that advice is, rightly, tightly regulated in the UK. "At the moment, if anyone goes to an independent adviser the advice is regulated, and in the event of bad advice there is some recourse," Adrian Lowcock points out. "The Money Advice Service, contrarily, does not take responsibility for its actions."

Tony Hobman, chief executive of Money Advice Service, says the online site can help millions. "We want to change the way people think about and manage their money, reaching out to the millions of people who do not currently seek practical money advice – because they think they don't need it or they can't afford it," he says.

He says the service is designed to complement the work of professional advisers. "Where we identify that someone would benefit from regulated financial advice, we will point them in the right direction."

But Philippa Gee is concerned that the new site could be the catalyst for others to offer generic guidance and call it advice. "Many organisations are looking at offering this type of online model and if the Government is seen to be able to describe it as advice, then why shouldn't others? This could be the start of a very sorry tale," she says.

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