Middle Britain is being priced out of getting financial advice
The situation could get worse before it gets better as the watchdog's new rules come into effect, Danielle Levy reports
Saturday 04 January 2014
A year ago financial advisers were banned from taking commissions from new products they recommend. They must now charge a transparent fee direct to the customer for the advice provided. The effect of these rules, known as the Retail Distribution Review, has been that high street banks and a growing number of financial advisers have withdrawn services for those with less than £100,000. They argue that the cost of servicing this tier of clients has become too high.
The result has been what many are describing as an advice gap. And sadly, a recent survey carried out by Yorkshire Building Society suggests that it is widening. It found that one in four savers are finding it difficult to access or simply afford financial advice, with the average minimum investment amount set by advisers at £50,000.
This comes at a time when the retirement age continues to rise, making the need for long-term savings all the more important. Likewise, new rules concerning workplace pensions are encouraging individuals to take greater responsibility for their own pension pots.
The Conservative MP Mark Garnier, a member of the Treasury select committee, believes the advice gap is real, is growing, and will hit those most in need of financial guidance the hardest.
"There is no doubt about it. Whoever you talk to there seems to be a general consensus that unless you have £75,000 or a reasonable income – perhaps one that is similar to an MP at around £65,000 – people are not getting advice," Mr Garnier said.
While advice for wealthy individuals is much easier to come by, he says the problem is that it is the "nickel and dime" savers that need this advice the most.
Sadly the situation is the same for those looking for someone to manage their investment portfolio on their behalf. Brewin Dolphin – a firm that has built a reputation as an investment manager to Middle Britain – is withdrawing investment services for those with less than £50,000 to invest. Clients who are affected are being offered execution-only portfolios as an alternative. This means no advice is received and the individual has full responsibility for managing their money.
Stephen Ford, the head of investment management at Brewin Dolphin, said the company hoped to re-engage with these customers once it had developed a new proposition that was simplified, did not involve face-to-face advice and was more cost-effective for staff to deliver.
"The advice gap is real, it is here and it has opened up faster and wider than many expected, including ourselves," he said. "In some respects we have been creating our own internal advice gap for lower value clients, but we want to be part of the solution to the advice gap."
The advice gap is not a new concept. In the years that preceded the RDR rules coming in, it was predicted that advisers would leave the industry and/or shed smaller clients. With this in mind the Government set up the Money Advice Service (MAS), which provides free advice online and over the phone for consumers. Great idea, but sadly the service has come under fire from critics who say it is failing to engage with a wide enough audience.
In a recent report the Treasury Select Committee went so far as to brand it "not fit for purpose".
On a more positive note, a number of new businesses are seeking to close the gap. Whether you wish to engage with them comes down to whether you are a technophobe or technophile. They are predominantly online models that are lower cost and able to cater for those with smaller sums to invest.
Money on Toast, set up in 2012, offers advice on investments, pensions, insurance, and mortgages. The company is able to deliver advice at a lower cost by providing the entire advice process online. "Doughbot", an online robot, gathers information on the user via a questionnaire. A report is then created, based on the user's personal circumstances, and recommendations are made.
The company charges a one-off 1 per cent fee across all products if they are purchased. Users can opt to pay an optional 0.5 per cent ongoing fee to have their portfolio continually monitored. A £7.95 flat fee is charged for share trading with discounts available on fund purchases.
Senior partner Chris Nicholls said: "A service like ours can give people advice online which significantly lowers the cost associated and means you can pass the cost saving on to the consumer. You don't need to charge £150 an hour to speak to an adviser."
Hargreaves Lansdown is another business that is benefiting from the barriers to face-to-face advice that are emerging. Its "do it yourself" fund and stock trading platform Vantage continues to attract new customers, while its telephone advisory team – which deals with anyone with £20,000 plus – saw a 78 per cent rise in enquiries in 2013.
Danny Cox, the head of financial planning at Hargreaves, believes the substantial interest can be attributed to a desire among the public to feel that they have control over their assets, with the ability to view valuations online, 24 hours a day.
So is the advice gap simply a reflection of the fact that much of the financial services sector is undergoing profound change? Nick Hungerford of Nutmeg subscribes to this view. The company he founded in 2012 is another low cost online model. It offers investment management for those with as little as £1,000 through a range of portfolios that invest in index trackers. Charges start at 1 per cent for those investing between £1,000 and £25,000. They are then tiered, dropping to as low as 0.3 per cent for clients with £500,000.
Mr Hungerford expects financial advice will no longer be sought on an ongoing basis but rather for specific situations, such as setting up a pension or inheritance tax planning. He views this as a positive and expects the Retail Distribution Review will ultimately lead to better outcomes for consumers.
"In the future we will see the advice gap melting away and it will be filled with specialists who give certain advice and they will do this in a way that is cost-effective and with the right business model," he said.
If you are being priced out of receiving financial advice, fear not . There are a growing number of options available but don't be afraid to be selective and clear about what you are looking for. The way that consumers are engaging with financial advice is clearly evolving, but it will take time for certain sectors of the industry to catch up.
Danielle Levy is news editor at citywire.co.uk
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