Tuesday, 16 October 2012

The rise of the DIY investor

At the moment I feel a little bit like a battleship from the game battleships. The pressure is to avoid direct hits on your ships but the more that is fired at you the more you are likely to be hit and eventually sink.

With the retail distribution review taking full stage, journalists smell a story and unfortunately the stories do not favour financial planners. It makes me feel that financial planners are like the battleships under constant fire and slowly being chipped away. The problem at the moment is that really they are not getting the same traction back in the press.

When you read my blogs I admit I sit on the fence when it comes to going direct, or going to a financial planner. The reason is that I have developed a direct proposition only to discover you need deep pockets for it to work and I currently work for a financial planner where I can see the benefits of receiving financial advice.

The latest broadside by the press was an article in “This is Money”. The article uses research by AXA Wealth indicating that 54% of individuals who currently use a financial adviser said they only rely on them for more complex investments. This is a springboard for the journalist to assume there will be a massive rush towards DIY investors.

The reporter then makes the assumption that because the relationship between product provider and financial planner is changing to a relationship between client and financial planner this would see a massive increase in fees.

I would like to dispel this myth. Many financial planners have a fee structure in place – this could be an hourly rate, a monthly retainer, percentage of investments managed or a combination of these options. It could be that some might set a minimum for the work they do.

How the fees are paid depends, this could be as a direct payment i.e. by cheque (or card) which is likely to be subject to VAT, or as a payment out of the amount being invested.

So for example, if a client currently has £100,000 managed by a financial planner the current “commission” might be 1% a year, so £1,000 p.a. The financial planner and client may agree that going forward the fee is 1% a year. Furthermore they may agree that the fee is taken from the investments. So clearly the fees are not going to rocket…….

The problem which perhaps the Mail has not articulated very well is that there is a tipping point where actually the amount of work needed to manage and advise on an investment means that it is not worth doing. So for example, if a 1% fee is agreed on £25,000 the work involved would not make it worthwhile unless there was other investments connected with it – so the example an employer, or perhaps family and friends.

It could be that financial planners start to turn away clients with less than £40,000 to invest because they cannot financially make this work unless the client is prepared to pay a minimum fee which is unlikely. Or they may look to develop a simple packaged solution.

The article is however the first article to expose the faults of the direct propositions – most are funded by hidden charges. Some taking up to 1% rebates from fund houses. Currently the direct providers do not need to disclose these fees and many investors think that like they were getting financial advice for free they are getting their direct investments for free. Hence the horror when Interactive Investor started charging. AXA Wealth perhaps provides an indication where the likes of Hargreaves may go with a percentage charge of the money invested and possible a service charge. How investors respond to this, well we will have to wait and see.

The point of this blog is simple fees are unlikely to go up for people seeking advice however what might change is that it becomes harder to find advice where you have smaller sums to invest. Therefore direct operations do have the ability to provide a service and solution to these clients but what comes with this is a responsibility not to sell just products and investments but also provide true financial education so that investors can make proper informed investment decisions, and provide a clear charging structure.

This is the message all parties both direct and advised should be getting out there.  

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