What is RDR – the dangers of undervaluing advice…

There is so much noise about RDR that sometimes we lose sight of what advice is all about.

We have moved to a society where actually we want to do everything ourselves, and often in doing this we focus more on money than the outcome. Let me give you an example.

We drive an 11 year old car, it is in fairly good order and we regularly service it but we were worried that if the car suddenly broke down we would be landed with a large bill that could be more than the value of the car. So we purchased warranty protection from a company called Go Car Warranty. The warranty looked okay, it would pay £500 towards the cost of a serious mechanical failure. So we agreed to pay for three years cover in advance for a very good discount.

Looking at all the other warranties this was by far the cheapest. For the last 18 months we have had peace of mind that we were covered. Then our worst nightmare happened, the car suddenly broke down. To cut a long story short when it came to get them to pay they turned round and said no. Apparently although the parts are not fully worn it is classed as wear and tear.

The problem with things like car warranties is that there isn’t anywhere you can go for advice so you therefore focus on cost and if the terms and conditions look okay you sign up.

This made me think about advice and the danger of undervaluing advice.

I have read that up to 5 million will have no access to advice. If we take my scenario, say 50% of those people decide they need to do something and make provision for retirement then what will they do?

Potentially we are told that the power of the internet has enabled us to make our own decisions. So we want a pension and we Google pension and hey presto we get a company coming up on the first page. We might not look at cost and in fact it might appear to be free. So we go for that, then we realise we need to invest the money so we pick from the most popular funds.

And that’s it, job done……

The problem is that if we don’t do anything when we come to benefit from the plan we are likely to be disappointed.

We could argue that actually people who do it themselves are savvy investors with lots of money but below are some stats:

• 1 in 3 SIPP (pension) investors do nothing once they have set up the plan    
•  Recent articles have indicated that many people do nothing to review the amount they are investing – consider paying £50 per month for 20 years this will deliver a disappointing income
•  The average investor in one of the largest DIY investor platforms has £40,000 across all investments (pension, ISA etc)

Consider the following stats from unbiased.co.uk:

• Individuals who have an adviser tend to have more holistic solutions like life insurance, pension and investment products than non-advised individuals

• The current average pension pot for consumers who have been advised on their retirement planning is £74,554.30, nearly double that of those not seeking advice

• Those who have taken advice put nearly a third more a month into their pension plan

• On investments, people with an adviser save for longer and contribute more, leading to an average investment value which is over £40,000 higher than the average for those who haven’t sought advice

Going back to my car warranty I cannot turn to anyone for advice and actually because of that I am worse off. I know nothing about cars or car warranties so if I could find someone to advise me then the value of paying someone to deliver the right solution would be invaluable. This is the same for advice.

I believe that people can do it themselves, and we should encourage more people to do this; the key is understanding the concept of building financial plans and building solutions to deliver on those goals. But there are many people who don’t know how to do it, and won’t be able to do it, or don’t have the time to do it and therefore need to seek advice.

We can focus on the costs of the advice but actually we should be focusing on the service that you will receive. If you understand the service you will receive and you work closely with your financial planner then that advice can be worth a considerable amount more than what you pay for it.