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, iii.co.uk 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 iii.co.uk 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.  

Unrealistic expectations

All we seem to hear about is people complaining that we have to pay more and work longer and this made me think, are we living with unrealistic expectations? 

The state pension was introduced by Lloyd George in 1909 where the state pension age was set at 70, since then it has been lowered to 65 for men and 60 for women, and shock / horror it is creeping back up. When we consider life expectancy in 1909 to get to 70 was one thing but to live beyond that was another. If we consider someone living to 65 will live on average until they are 79 realistically should we not be moving to a retirement age of 75?  

Public sector workers feel it is their right to have a pension at 65 and not have to pay for it, we feel it is our right to have a pension at 65 and not pay anymore for it but enough is enough. Our leaders (all parties) need to stand firm and make radical moves now. 

This is an important part of retirement planning because we are blinkered to think we have a right to retire at 65 and we think that at 65 we should take no risk with our money and in fact a number of regulatory bodies take this view. After-all our grandparents put money in a building society and could expect to get 7% return on their cash as income and the capital was fully protected (this of course ignores inflation) but can you imagine at 45 or 50 being told that actually you should move all your money to cash to protect it. This is no different to what the view is when you get to 65, if you live for the average of 14 years and in reality 20 to 25 would you really tie up your money in cash? 

Where is all of this going, I read a lot about the future of platforms, RDR, clean share classes etc etc but actually all of this is irrelevant if we don’t take steps to change a mind-set that is rigidly set in the past. Change needs to come from the top and that has to be a move towards moving the retirement age under public sector and state pensions to 75 as quickly as possible. But also change needs to come in the way we think, financial education leads to an understanding of financial planning. 

Financial planning is key to all of this, just because the state pension moves to 75 doesn’t mean we can’t slowdown in our sixties after-all how many of our parents or grandparents aimed to slowdown in their fifties. Financial planning goes back to setting realistic goals and delivering on long term plan, it’s about acknowledging life expectancy changes and ensuring that money continues to work hard in retirement and it’s about ensuring that ultimately we take control of our retirement and don’t spend time dreaming of a past which has past! 

To round this off consider the debate around annuities and drawdown. The point is being missed. The amount you get from annuities is less than twenty years ago for a number of factors - gilt yields have gone down but life expectancy has increased. Realistically can you expect to get the same as you would have done twenty years ago, of course not? Is drawdown the next big miss-selling scandal of course not it is a vehicle which adapts to our changing retirement patterns. The point is financial planning helps you consider holistically everything you have and how to deliver what you need in retirement.

My question is who is big enough and bold enough to take this forward - Cameron, Clegg or Miliband? 

What does the future hold for UK financial planning?

The recent IoD Paper entitled ‘Roadmap for Retirement Reform 2012’ painted a stark picture where as a society we have moved from a society of savers to a society of debtors. This was fuelled by the explosion of debt, starting with hire purchase and credit cards through to perceived wealth through the explosion of house prices.

For many they both saw the writing on the wall and did nothing or they assumed it would continue for ever. Some did see the problems and did not partake. The problem is that the party is over. Even a small increase in interest rates will tip many over the edge. Those now waking up to the hangover left over by the party are desperately trying to clear up the mess, paying down debt and cutting back on expenses. The problem is that in doing this we are sacrificing saving for our future. 

We also have this unrealistic expectation that we can all retire at 65 and live for the next 20 plus years paid for by thin air. Retirement at 65 was designed when life expectancy post 65 was short. To live for 20 plus years past 65 means a whole new challenge for us. We can complain and moan but the reality is that the party is over and we need to look to the future. 

I will not pretend to be an expert on RDR but clearly the intention was to bring transparency to the market and help those at the lower end of the scale. The problem is that there is so much miss information that actually RDR has the potential to be another mess. I have always felt that RDR will split into three camps: 

1. Lower value – clients with small pots of money will be dragged to the banks. The problem is that more and more banks are actually pulling away from this. So where do these people go to get advice
2. Mid value – the average value of clients of the largest direct operation is £40,000 each. Financial planners have indicated that anything below £100,000 cannot work for them. Clearly these people need to go somewhere and the direct market should soak them up 
3. Higher value – these clients are likely to be already serviced by financial planners and will continue to be serviced by them 

The problem is that the public is not being education, the FSA have not finalised important aspects of the change and financial planners are struggling to determine what they are going to do. I have stories of two extreme camps – one where a financial planner is ready, they have less than 100 clients, average investments of around £1 million and a fees of between 0.75% and 1%. The business model works well. 

On the other extreme I have seen a financial planner with 4,000 clients who thinks he only has close contact with 2,000 clients. The other 2,000 clients have around £70,000 and he has almost no contact with them. Now I would say of the 2,000 he has “contact” with in reality only 200 are high value clients. So what does he do? He doesn’t want to lose 3,800 clients and all the revenue that comes with it? 

And this is the mess that we are in. A lot of platform solution providers are providing financial planners with the tools to service these clients but actually they don’t know how to do this. 

The big problem I believe and this is where the government needs to have a ten year plus roadmap is that we need to re-educate people about financial planning. The direct operations do not educate people – they are marketing machines churning out products and solutions. The clients are not in control of their savings. When the markets fall clients rush to cash and the amount of cash clients hold is scary, this is because they have no plans and don’t know when to get back into the market. 

RDR is a mess because fundamentally it is leaving a whole slice of people without any means of advice. It means that they need to plan for their future and yet they have no idea how to do it. I believe strongly if a company could turn the whole marketing machine around and introduce the whole concept of financial planning i.e. goal setting, risk etc then over the next few years they could be a force to face. 

 Going back to the financial planner with 4,000 clients personally I would segment the client base and with slick systems introduce an element of non-advised service to the 3,800 clients with low charges but with a service around education, providing tools to set goals, consider risk and then look at solutions. In time like Australia these clients may have more money and want advice and then become key clients. 

The IoD paper just scratches the surface. We have a nation where we are indebted and we are not savers, RDR is forcing people down into the arms of direct operations and these operations are doing nothing to truly educate these people. They work on the assumption that they know what they are doing, this is not the case – they have no choice. 

The roadmap is key, the government seem to have no interest in financial education and this is because they have a short term view of the future. The reality is that we have a financial illiterate nation, a nation of debtors and a nation of people with unrealistic expectations of retirement. The future of financial planning in the UK looks very bleak, but I do believe there are small signs of light and it is those small signs that we need to hold onto.