Online advice? Don't bank on it
Advisers say a new website may lead people into the wrong decisions.
Saturday 18 June 2011
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 crucial 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 shortchanged. 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 across the country, 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.
"While disclaimers and suggestions to seek external advice are visible on the website, the architecture and design of the site means most readers won't notice them. And for most consumers, seeing the word advice will be enough to trust the site – the fact it is unregulated won't resonate."
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 £47.3m 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 are critical of the site itself, which they say could offer a good starting point for many.
"The general approach of the website is decent enough," says Philippa Gee. "I think many of the questions asked are in a basic language that wouldn't put people off and it can help people to think about their financial priorities."
Adrian Lowcock, senior investment adviser at Bestinvest, agrees. "The Money Advice Service could be a useful source of information for some individuals," he says, but adds: "I think it is very important they explain exactly what it is they are offering. The idea of being able to provide unregulated advice makes me nervous. The aim of the industry, the regulators and the Government should be to improve services and protection for clients. I do not think offering unregulated advice helps clients."
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. That means anyone with a £100,000 investment will be charged up to £3,000 upfront. Commissions take an even bigger chunk of cash out of an investor's pot. They can be as high as 6 per cent, which is £6,000 on a £100,000 investment.
On top of that, annual fees for reviews are usually between 0.5 per cent and 1 per cent per annum. That means that you could lose a tenth of your nest-egg in fees and charges for using a professional adviser. 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.
"Advisers should explain the value they add for their fee," says Cox. "Under the right circumstances, good financial advice is well worth paying for."
Charlie Thomas goes further, believing that expert advice is crucial in many instances. "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. Comparison sites don't allow for specific underwriting which takes medical histories, lifestyle choices and the overall wealth portfolio of an individual into account – and unlike personal lines policies, such as car insurance, you can't change your mind if you discover you've bought the wrong product."
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 because they smoke, drink, or have some medical condition.
"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," points out Lowe. He says the gap is because the majority of people are ignorant of the better rates they could get.
But the more people use generic "advice" sites, the greater risk they will lose out. Research by Oxford Economics suggests that last year alone, 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," points out Adrian Lowcock. "The Money Advice Service, contrarily, does not take responsibility for its actions, and as it is unregulated advice it should only be considered guidance to ensure clients are not confused."
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.
"The advice we give is free and unbiased but is not regulated. This means that we do not sell or recommend any particular financial products but we can set people on the right path in terms of understanding and managing their money."
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. In fact, we anticipate that our service may lead to more people turning to IFAs when they need a specific product."
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.
What is the Money Advice Service?
Millions of people are worried about their everyday money, and don't know where to turn. Nearly 17 million people are worried about day-to-day money, while 23 million people are unaware or unsure of where to find free, unbiased money advice, according to the Money Advice Service.
It's for that reason that the new site at www.moneyadviceservice.org.uk/healthcheck has been set up, says Tony Hobman, chief executive of the service.
He says: "23 million people are unaware or unsure of where to find free, unbiased money advice about key money matters such as borrowing or credit. That's around half the adult population of the UK who could feel better about money if they knew where to find us."
Gerard Lemos, chairman of the service, says the site is the money equivalent of a reliable sat-nav. "We help people to see where they are now; and then we help them get from A to B by the best route for them."
He says the new online health check can, in less than 10 minutes, identify the top three things people can do to make the most of their money. In other words, the site is aimed at people with reasonably simple financial worries.
The service is also planning face-to-face help, and may become more powerful in the future, according to the Treasury's Mark Hoban. He revealed this week that the Government is considering giving the Money Advice Service responsibility for running debt advice firms.
However, there are already lots of free sources of basic financial and debt advice, not least through the national network of Citizen Advice Bureaux.
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