Finance advice made simple - or just 'idiotic'?
Proposals to offer free guidance to Britain's low earners are under way, but problems remain
Sunday 21 January 2007
"Sometimes, people just want to discuss their financial options and not buy anything," said Ed Balls.
With a surprising candour, and reflecting public distrust of the UK's commission-driven financial services industry, the Economic Secretary to the Treasury last week set the ball rolling on plans for a new type of financial advice.
The idea is to create a high-profile national network offering general help - face-to-face, online, over the phone or a mix of these - to the public on all aspects of personal finance.
The Government wants to fill what it sees as a gap in the financial advice market, allowing consumers to talk for free - about pensions or savings, say, or how best to purchase a property - with no pressure to buy a financial product.
At the moment, most advice given by banks, insurers, building societies and independent financial advisers (IFAs) is based on the sale of individual products. Advisers are largely paid through commission, raising questions about their impartiality.
The new advice network is part of the Government's grand "Financial Capability" scheme to promote the UK consumer's financial education. How the network will be set up is unclear but Otto Thoresen, chief executive of insurer Aegon UK, has been given 12 months and a budget of £2m to come up with a blueprint.
The outcome, Mr Balls said, should be "a national generic financial advice service - ensuring that every person, including those on the lowest incomes, can get quick, easy and simple access to good-quality financial advice".
This goal was broadly welcomed by many in the industry who believe that the new network will sit comfortably alongside paid-for advice, and provide a genuinely new service.
"You could get people taking along a confusing letter from an insurer or the tax department, say, and asking for an explanation," says John Ellis from the professional IFA body the Personal Finance Society.
"Many people just want the ability to go to somebody and get such queries answered. But [because of their business model], IFAs are not interested in talking to people unless they have money to spend."
Neil Shillito of SG Wealth Management, an adviser that charges upfront fees instead of relying on commission, agrees.
"The truth is," he says, "most people just need straightforward financial advice to get the basics right - like avoiding too much debt, getting some life cover and starting on saving.
"People with elaborate advice needs will be well served by fee-based advisers who take no commission but get paid directly by the client."
But others believe that the advice industry as a whole will benefit from the new service, whether or not commission is paid on the products recommended.
"Generic advice is limited by its own nature," says a spokeswoman for the Association of IFAs. "People may subsequently end up wanting product advice [from IFAs]."
David Elms of IFA Promotion, the marketing body, agrees: "If this were the way that people start getting advice, it could lead to more people getting advice from an IFA further down the line. In effect, they would graduate from the new network to an IFA."
As he begins the 12-month study, Mr Thoresen has a largely blank canvas, yet many concerns have already been raised.
One is whether there could in fact be a link - commercial or otherwise - between the generic advice network and IFAs.
A Treasury spokesman says that the plan is "not about selling products" but would not comment on any "referral" of consumers that may eventually take place.
It seems likely that part of the remit of the new network will be to give advice to employees on whether they should enrol in the proposed national pension savings scheme (NPSS), due to be introduced in 2012. At last week's launch, James Purnell, minister for Pensions Reform, stressed that the network would "be vital to help [workers] make... decisions [on whether to join and stay]".
However, the network is targeted specifically at people on lower-than-average incomes, whose entitlement to means-tested benefits could be affected if they join the NPSS. This makes the issue a potentially tricky one for financial advisers, exposing them (and the Government) to the risk of mis-selling claims, should workers be disqualified from receiving benefits on reaching retirement.
"It will be very interesting to see if the new network advisers talk about the NPSS and means-testing," says Steve Bee, head of pensions strategy at insurer Scottish Life.
"Only this week, a letter from the Financial Services Authority [FSA, the industry regulator] pointed out how advisers may 'want to consider taking into account whether a product will affect a customer's entitlement for means-tested state benefits'. This is really important."
A spokesman for the Department for Work and Pensions says only that "means-testing is an issue that we will look at as we develop", but stresses: "The final decision on whether to save will be a matter for the individual."
The FSA recently expressed concern about the quality of financial advice given to the public. Two weeks ago, it published findings from a survey of mortgage advisers, showing that only a third offered "suitable" advice to borrowers. Many failed properly to assess "affordability" before selling a home loan.
Some IFAs believe the advice-network plan is a non-starter. "It's a waste of money," warns Mark Dampier of IFA Hargreaves Lansdown. "The Government is concentrating on the wrong thing. Ordinary people need to know what questions to ask [in the first place] with their personal finances, and you only get that with education."
The best way forward, he says, is to introduce compulsory personal financial education in schools: "Every year that we don't have such lessons in schools, it's a case of another crop of 16- to 18-year-olds coming out and not knowing what an interest-only mortgage is, or an annual percentage rate. It's idiocy."
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