By James Daley, Managing Director of FairerFinance.com and former Editor of Which? Money magazine
Financial advisers are still failing to make it clear how much they charge. It’s one of the reasons that so many people don’t take advice at all.
What’s the going rate if you need some financial advice about what to do with your pension? Any guesses? Nope – me neither.
If you take the logical first step of searching for an independent adviser on the web, you’ll find there are plenty of firms to choose from. But go one step further and take a look at their websites and you’ll struggle to find any that give an indication of what they may charge if you decide to use their services.
If you pick up the phone, the answer tends to be equally unrevealing: “Er, it depends, sir. Come in for a free review and then we’ll let you know”. But while a free, no-strings assessment may seem like a reasonable way to get the ball rolling, most people don’t want to open up their financial affairs to a stranger if they have no idea how much they’ll charge. The lack of transparency breeds mistrust and leaves customers assuming that if they can’t be transparent on their charges, then they may not be entirely trustworthy.
At this point, many potential customers walk away – and decide to try to make the decisions on their own – using the web or tips from friends to make their own choices. This can end up being a choice that costs them a lot more than if they’d taken professional advice – but it’s not hard to see how they got there.
In its review of the new (ish) rules governing financial advisers, published in December 2014, the FCA confirms that disclosure of charges is still a problem. Even those who are already customers of IFAs often seem to have no idea how much they’re paying. And without much better disclosure, there’s very little room for any competition on price – or indeed anything else – in this market.
If you ask customers of financial advisers whether they’re happy – the answer will almost always derive from how well their investments have performed relative to the expectations that the adviser laid out for them at the beginning. By and large, once a customer has signed up with an IFA, it’s pretty easy to hang onto them. All the adviser needs to do is manage their expectations appropriately.
Given the very low levels of switching – and the difficulty for customers to have any kind of objective sense of whether they’re getting good or bad advice – it’s vital that customers can at least be clear on how much they’re paying for advice services at the very outset.
Closing the advice gap
The FCA’s new rules have shaved off the worst excesses in the financial advice market. Thankfully, the days of selling investment bonds, simply because they paid high commission, are over. But the next step is to try and find ways of making financial advice available to a much wider audience.
The FCA’s review confirms that while standards of advice are rising, IFAs continue to serve a very small proportion of our society. While there are millions who may be fine with the simple generic guidance that the likes of the Money Advice Service and Citizens Advice offer, there are also hundreds of thousands, if not millions, of others who would benefit from financial advice but don’t engage because they fear it’s too expensive, and assume that it’s only a service for the very wealthiest in society.
The new pensions guidance service will hopefully be a gateway to many more people getting financial advice when they retire. But the FCA now need to focus its efforts on finding ways to ensure that people can get access to financial advice earlier in their life – to ensure that they’re in the strongest position they can be when they finally reach retirement. Part of that effort needs to include an insistance that IFAs are upfront about their charges. It’s a vital step in rebuilding trust between customers and IFAs.
Read more: Over 50s life insurance – is it right for you?