Journalist horror story: how to silence ‘half-truths’ before they start to spread doubt into the unsuspecting public

In the last few weeks I have seen a few blogs. A couple by Ian Cowie of the Daily Telegraph have concerned me. The problem is that what he prints is not untrue but it paints a much distorted picture. I could say I bought a car with four wheels and it was a con. This could be true but there is a lot missing from the story before any decision can be made.

His latest article states that most IFAs rely on commission paid to them by the insurers and fund managers rather than charging the clients a fee. He then goes onto to compound this by using the example of hidden charges on unit trusts and OEICs. He points out the transparency of other forms of investment but to be fair you don’t get to the bottom of the article because the damage is done. This is the same journalist who claimed that IFAs who do nothing will continue to take in their commission.

None of this is untrue but it is clearly half-truths and an easy way to draw in the public to hate commission hungry sales people. 

Let me explain where I think his thinking comes from. Over ten years ago I worked for a couple of insurance providers. I saw two cases which made me feel really uncomfortable. The first was a financial adviser setting up a group personal pension scheme where he was set to receive £100,000 plus up front and around £100,000 a year. The second was a financial adviser who transferred a client out of the British Airways Pension Scheme who took £35,000 in commission and a further £35,000 from the two unit trusts the money was invested in.

To some extent that painted my view of financial advisers and this was compounded by what I read in the papers. 

In reality this was over ten years ago and what journalists like Ian Cowie seem to have missed is that in the last ten years (and possible more) a lot has changed. In the last four years I have done a lot of research into this market and below are two key observations:

Financial Advisers

Many financial advisers, or financial planners as I prefer to call them, have moved across to a fee structure. This structure can differ from financial planner to financial planner but it can be a retainer fee of say £30 per month and possible a percentage fee for managing assets, it can be a percentage fee for managing assets or it can be an hourly fee. 

For many financial planners who have moved across to this way of managing their clients they use what is called a wrap platform (a point Ian Cowie seems to have missed). This is in many cases the most transparent way to manage client money. For a fully transparent platform they ensure any rebates from fund managers come back to the clients. So effectively taking Ian’s example a fund charging 1.50% may have a rebate of 0.75% which comes back to the clients cash account. 

There are arguments as to how this should be used and the FSA argue that this is incorrectly being used to cover fees. I would argue against that because once you move down this route then actually everything is transparent and the clients in many cases are happy for this to cover the cost of the advice.

And remember ultimately the platform is the end solution; the financial planner will have worked from what the goals are and then delivered the solution at the end. 

I will cover costs at the end because this again is a flaw in Ian Cowie’s argument. 

DIY Investors

Ian Cowie talks a lot about ‘free financial advice’. I notice one of the comments from janetjH on his blog about “the good thing about managing your own affairs is that you are not paying hidden charges to people who couldn’t care less about your future”. 

Let’s stop; this sounds like ‘free non-financial advice’. I go to a “free” platform. There is no upfront charge for buying funds and in some cases I may even get a slight discount on the fund. Say a 1.5% fund is charged at 1.35%. So I am getting 0.15%. So actually I feel like I am getting something for free.

Let’s go back to what Ian Cowie is saying, many OEICs / Unit Trusts pay rebates. If you go direct who get these? How do the direct platforms make their money? 

Before I answer this consider iii.co.uk who recently said that they would move to a fixed quarterly charge of £20 and pay any rebate back to the client cash account which could then be used to fund the charge. There were cries of disgust that they were now charging for the service but hang on they always were.

So going back to the question I have heard some direct platforms are receiving up to 1% in rebates so even if they give back the client 0.15% they are taking 0.75%. This doesn’t sound free to me. 

Direct platforms do not need to change their practice until at least 2014. It also appears that if clients stay in a rebate paying fund then the direct platform can continue to take those healthy rebates. 

This is something journalists should be investigating.

Comparing costs

For nearly five years we have adopted a fee structure of up to 1% of the assets managed. We may also charge up to 1% for new money. All fees are agreed up front with the client.

I had a look at one of our solutions and the maximum cost would be around 2.05% p.a. (so on £250,000 this would be £5,125 p.a.). This covers the cost of the platform, the investment and our fees. If we build in the additional expenses of the funds this will add a further 0.19% or £475 p.a. 

Now if I build the same portfolio with a provider that has no rebates the charge on the same portfolio would be around 1.50% p.a. (so on £250,000 this would be £3,750 p.a.). Again you need to build on the additional expenses of £475 p.a.

So the difference in cost is around £1,375. The question is what you get for this additional cost? For many this is peace of mind, and this peace of mind of mind is delivered via the service proposition. Financial planners look at the whole picture and not half a picture as journalists tend to have a habit of doing.

Don’t get me wrong Ian Cowie has done nothing wrong but he needs to be careful about painting half a picture and actually consider how he can help the public as we move to these changes in 2013.

The hidden dangers of going direct…..

After I said about avoiding the scary headlines I want to outline a brief piece on going direct and their charges.

As I pointed out in my last article going direct is NOT FREE. In many cases the providers are taking large fees from fund houses, I have heard rumours of one direct provider receive up to 1% from fund houses. So from a client side they are happy because say the fund charge is 1.5%, the provider offers access to the fund at say 1.4% so the client feels happy.

When we break this down the fund house gets 0.4% and at the extreme end the provider gets 1%. Nothing is certain but what is certain is that direct operations don’t need to do anything until 1 January 2014.

I will cover some of the options further in this article. One possibility as highlighted in the last blog is that if they “encourage” clients to do nothing they could continue to receive these large payments as it would be in their best interest to encourage this. Whether ethically and morally they would do this is, is another matter.

We know from recent press articles that many clients invest their money in a SIPP or an ISA and do nothing so this is a possibility.

However for those who are active what are the options:

1.  We could see direct operations charging a percentage fee say 1%, if this was the case then clients would in real terms be no worse off and they would then have to consider whether the service they get warrants that fee
2. We could see as we have seen with a few providers a quarterly fee, I will cover a serious consideration on this. For me this appears the fairest route but beware of all the additional charges which can make what appears cheap an expensive fee

On point two you as the client will need to manage your cash account a lot more actively to ensure you have sufficient money in your account to cover the fees. And remember my point about tax implications i.e. charges from an ISA will come out of the ISA allowance, and non ISA investments may be subject to CGT.

I suppose the point is that direct operations have a further year to get their ship in order, during this time they will target the lost clients and this is where the danger lies. Clients who are thinking of going direct should be asking questions about future charging, the service and possible changes before they do anything. Otherwise they could be faced with the same dilemma in twelve months’ time.

The end of free advice…..

The purpose of my blogs have primarily been about promoting the idea of financial education whether this is at schools, which would be ideal, or at any stage of someone’s investment cycle.

One of the biggest changes about to hit us is something called the Retail Distribution Review. In this article I want to focus on the adviser side. In my next article I want to touch on the implications for going direct because this is being ignored.

At the moment the press is starting to sniff a story and with all stories the danger is that investors will be the eventual losers. Here are some examples of recent headlines:

“How ‘the Silence of the Financial Advisers’ could make them a killing”

“The pending financial advice shake-up shambles and why RDR must be stalled”

“End of line for ‘free’ Financial advice”

I want to unpack some of key aspects of these articles but firstly the table below sets out the difference between the new adviser charging and commission:

Adviser Charging	Commission
An agreed payment made by the client to the adviser	A payment made by the provider to the adviser (sometimes agreed by the client)
An expense of the client (although Adviser Charges for pensions are eligible for tax relief)	An expense of the provider with no tax liability for the client
Managed by the adviser on behalf of the client – may be facilitated by the provider	Managed by the provider
On-going Adviser Charges can only be received where an on-going service is being provided	Trail commission can be received without an on-going service
Must be based on the services an adviser provides	Can be based on the products an adviser recommends

These are very subtle changes but the key is the relationship moves from the provider / adviser to client / adviser. The client can choose to pay the fee by means of a payment outside of the solutions (likely to be subject to VAT) or through the money held in the solutions.

If they decide to pay via the solutions then there are some small points they need to understand:

1. Any fees coming from an ISA will come out of the annual allowance
2. Any fees from from an investment bond will come out of the 5% annual tax deferred allowance
3. Any fees coming from non ISA investments may be subject to CGT

In plain English if a client had agreed trail commission of 1% a year, then from 1 January 2013 the adviser / client need to agree a new fee structure which could be 1% a year. So actually there is no real difference.

The differences are in how the money is taken and this is really important. Effectively the provider has provided the fee through rebates but ultimately whether transparent or not the client has ended up paying. Now those fees will be a lot more transparent.

It will also be important for financial planners to clearly identify their service proposition. So if I am paying 1% a year what is my financial planner doing for this? Effectively financial planners need to be good at communication and service and this is the key change from 1 January and this is what people are missing.

So turning to the scary articles:

“How ‘the Silence of the Financial Advisers’ could make them a killing”

The key point is that if no “transaction” happens then the financial adviser can continue to receive the old commission. So the argument is that some advisers will do nothing and continue to be paid. Interestingly and I have no evidence to back this up but I suspect with direct platforms the same will apply, if you stay in the same fund and do nothing they can continue to take the money.

So this is a loophole that both financial advisers and direct operations will benefit from which is a bad thing for all. The article is very clear about financial advisers but it should also be saying that direct operations could make a killing.

My advice to you is ask your financial adviser what their plans are, what the fees are and what the service is. I would also ask your direct operation the same questions.

Don’t be caught out…..

“The pending financial advice shake-up shambles and why RDR must be stalled”

The article by Lord Flight indicated that 22,000 advisers are not yet ready for RDR, part of this is due to the need to take further examinations. There are also complications with the EU which effectively allows member states to opt out of RDR. He argues that only the elite can afford adviser fees leaving many lost without advice.

His argument is that there should be a year delay. Interestingly for direct operations they do not need to implement any changes until 1 January 2014. This means clients could face the same headlines next autumn “the end to free investments”.

Whatever your view, the point is all sides of the industry have known about this for several years and actually everyone should go live from 1 January. The sympathy I have is that the FSA have not finalised some of the key points and although the FSA have said many providers are ready, my experience shows they are not.

My point again is talk to your adviser, or your direct operation and see where they are before you make any decisions.

Don’t be caught out……

“End of line for ‘free’ Financial advice”

The point really is back to the provider / adviser relationship and the fact this is going. I have long argued that those with £100,000 plus should be able to work with an adviser. Some advisers may offer a lean service for £50,000. Effectively if the fee is 1% then the maths are easy to work out.

If you take someone like Hargreaves in their last report and accounts you can work out that their average client value is around £40,000 so you can start to see a gap for clients.

I felt clients would go into two directions – the banks, however I have seen some of their fee structures and clearly this is not aimed at those with less than £100,000 and then direct operations. I still believe direct operations will benefit but non of these that I have seen provide any real financial education. Effectively they sell funds and products with no help on financial planning.

Financial advice was never free, the clients will now have to agree a fee and if they want that to come from the solution as before that will be more visible. The press need to be careful not to sensationalise this and add to the confusion.

The key really is to ask the adviser what their fees are, what service they offer and be open with how much you have to invest. There will be some who target those with less than £100,000 especially family members of clients, or perhaps those who see long term benefits.

So again it is about asking the questions and understanding that there was never free advice.

I know this is mammoth piece but be careful of the scary articles, digging around before you make any decisions.