Wednesday, 6 June 2012

What does MoneySavingExpert tell us?

A number of things have hit the press recently which highlight how the way we transact has changed. Whether you are a fan of Martin Lewis or not, what he has done is highlight that there is a way to make money from websites. However, you dress it up ultimately the way the site generates money is by viewers clicking on links, this is pay per clicks. Obviously the more people you have visiting your site the new more you can generate through this route. And although you can argue there is no bias you are going to lean towards those who pay you more for the clicks because ultimately that funds the website. 

Where MoneySavingExpert is different is that it tries to keep its editorial content independent. On many similar sites the editorial content will lead to a “product” sell which can lead to a commission kickback or a payment for the lead. However, and this is my personal view as MoneySavingExpert has grown it has become harder to act independently and the integrity of the site has slipped. The point is when you go to any of these sites you do not directly pay to visit them but ultimately you do through higher premiums whether in car insurance, household insurance, term assurance etc. So nothing is actually free.

Martin Lewis is a marketing machine picking up campaigns and promoting them through the media and his website, this generates new users, who visit his site and ultimately click through to other sites and this generates income. The more vocal Martin is the greater the revenue. But ultimately as I have stressed you lose your integrity and you need a way out. The buy-out offers this and personally I hope Martin will use this to go back to campaigning quietly for things that drove him originally i.e. CAB, education in schools etc. I admire what he has done and he has done it well.

But he has also highlighted some other things; from 2013 the finance industry is changing. There has been horror that financial planners could be charging £200 an hour for advice as highlighted by the Times et el. In reality most financial planners will charge a percentage fee of perhaps 1% a year and perhaps 1% or 2% up front. Now the maths on this are simple on £100,000 this will generate £1,000 a year in fees. The work that goes into this to provide a good service means that actually the profit on this is very small. So you have a problem, most financial planners have accepted that anything below £100,000 just does not work for them financially and actually for most practices a client base of over 150 is very difficult to manage unless you have a number of advisers which increases costs. 

So to some extent the top end will be covered by financial planners and whether you agree with the fees or not, once you understand the service that comes with this then you can decide whether the fee is worth the payment. 

The difficulty lies in the majority market, a consequence of the changes in 2013 is that the kickbacks that Hargreaves,   BestInvest, Fidelity, and others have enjoyed are likely to go. So for example on Hargreaves this can be as much as 1%, assuming the average investment is £40,000 then this generates £400 a year. For middle men like Cofunds it is slightly more complex as they may take 0.25% and 0.5% might go to the provider of the product. The point is everyone thinks what they are getting is free, similar to price comparison sites but in reality they are not.

Of course, this creates a problem. Interactive Investor is one company that may have either made a shrewd move or shot themselves in the foot. Over the last few days they have emailed all clients saying they will charge £80 a year for their service but they will rebate any kickback on funds (remember any rebates maybe be banned in the future). The shock for many investors is that a free service suddenly becomes “expensive”. It is also complicated because each trade (including funds) is charged at £10 unless you trade on 23 of the month where the charge is £1.50. Once you add it all up actually you can see that for a client on £10,000 in a fund with a kickback to they were paying £63 a year and now they are paying £80 a year (and potentially more depending on trades etc). 

The point I am driving at is that over the next few months others will follow and suddenly people will understand there is no such thing as a free lunch. Hargreaves will have to change their pricing structure, they cannot charge £400 a year so their profit will come down and this is not reflected in their share price. But Hargreaves and others are waiting partly to see what the FSA will say and partly to see what others will do.

For IFAs looking at making easy money from this I think they need to think very carefully. I suppose coming back to MoneySavingsExpert what they did so well was that for a long time they kept to their editorial integrity the sale has highlighted that ultimately they were a money making marketing machine (and no-one should be surprised by that). 

This should not be a shock to anyone, direct operations in financial services are no different and have to make money and with the changes coming in the charging structure will change. As one person highlighted in a blog the people who will lose are those just starting out whom potentially only want to pay £50 per month. Many of these sites will make it hard for them to invest unless you really understand the charges and as I have learnt in the last few days this is extremely difficult.