Buying motor insurance, house and contents insurance and even mortgages and shares over the phone is now a well-established fact of life. Telephone banking is making increasing inroads into traditional ways of doing business, as busy customers appreciate the lower charges and faster transaction time which direct-sales operations can offer, thanks to low overheads and cutting out the middle man.
Buying pensions over the phone is much less common. Scottish Widows is among the pioneers and this week Colonial Direct has launched a low-cost, flexible personal pension plan that it believes can be successfully sold in just two telephone interviews. The first is a fact-find lasting 20- 30 minutes, on the basis of which a proposal form is sent out, and the second call is a step-by-step guide to completing the form, which can then be signed and returned.
If it works, it will take much of the time-consuming effort out of buying a personal pension. It will also help to speed up the race to provide employees, and especially women, with the flexible pension provisions they will need in a future world of increasingly stop-start employment.
Nowadays, most people appreciate the need for a pension plan and appreciate the tax advantages of buying one. They are suspicious of the pension industry. But the same people still take it for granted that they need advice before they buy a pension, precisely because it is a long-term investment whose worth depends on a cost and charging structure few customers even now understand. It also depends on the future performance of investments, which cannot be guaranteed.
Most people also understand that there is a choice between advice from an insurance salesman who represents one or at best a limited number of pension providers, and advice from an independent financial adviser who can point out the pros and cons of many different pension providers.
Company salesmen provide advice that is cheap, indeed, it is free whether the customers decide to buy anything or not. Brokers will also provide free advice, but advice from salesmen and brokers alike is not independent. Like the casual-sounding disclaimers say in the advertisements, A is only able to give advice on A's own range of financial products. Brokers who offer free advice will expect a commission from the company whose products they recommend. Fee-based advisers, on the other hand, offer advice that is independent but certainly not free, and it will cost customers whether they buy anything or not.
Both commission-based and fee-based advice still require a face-to-face interview so the salesman or adviser can carry out the mandatory fact- find to try and establish the needs of the customer before making recommendations.
Inevitably, face-to-face interviews are a time-consuming business, and inviting an insurance salesman into your house can be an emotionally draining experience because the salesman is still entitled to use his skills to clinch a sale, and turning him away can be as stressful as rejecting a puppy. Independent advice, though, can be expensive if you end up unconvinced.
A growing number of investors are now increasingly at ease with the telephone. Quite rightly, however, customers will only buy over the phone if the product is cheaper and straightforward enough to overcome deep-seated fears of being committed to a poor deal. Most products fail the simplicity test because they confuse the two separate issues of charges and commission and investment performance.
Too few customers appreciate that all personal pension providers are allowed, indeed required, to project the future return from a proposed investment over a fixed period of time assuming three different possible investment scenarios: currently a cautious 6 per cent compound growth of the funds, a 9 per cent, and an upbeat 12 per cent. These figures are not forecasts and they never can be because future performance cannot be guaranteed.
But they are not pure illustrations, either, because each provider has subtracted his charges before calculating the projected return. These charges can include a deduction from the initial contribution, which covers the commission paid to the salesman or agent, and also a charge, usually 5 per cent, which represents the difference between the buying and selling price of the units in which most funds invest, and a annual management charge, plus dealing charges to buy and sell the underlying assets.
Costs, in fact, can absorb anything up to 8 per cent of the first year's contributions and 1 to 2 per cent a year over a 20- or 25-year investment. The projections of future growth, in fact, illustrate the charges and only the charges, not the investment performance. But this is where direct selling can score significant advantages. The direct-selling operation pays no commission to agents, brokers or salesman, and has lower overheads than a conventional office. If the product is visibly low cost and allows investors to stop and restart contributions at any time without penalty, there is a sporting chance that customers will buy a pension plan over the phone and be pleased with the product.
All the customer needs now is a product he or she can borrow against as well if necessary when redundancy or illness strikes, and we shall have the perfect pension product.
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