It’s a confusing market – charging for advice

Revolutions in financial services don’t happen often but we are facing one. The big talking point is that from 1 January 2013 individuals wanting to use a financial adviser / planner will have to pay a fee for their services.

This in itself may sound surprising because surely most people are already paying some form of fee. But the purpose of the change is that clients will need to agree to the fee and that fee needs to be transparent. 

In this blog I want to explore two areas, the potential trigger for advice and what a fee actually means. 

A recent report highlighted some of the triggers for seeking advice. Unsurprisingly the most powerful trigger for seeking advice is recognition by an individual of the limits of their own knowledge on a particular issue. The key issues appear to be around retirement planning and investing. The main issue in both cases is the confidence to do the research to get the best possible solution. 

The report then considers who will be able to pay for advice in the brave new world. At this point there are areas of the report that I think help to confuse this new world. The argument in the report is that advice is based on the top tier of earnings in the country, the 25% of the country who have total household income of £50,000 plus.

I wanted to explore this further because I couldn’t understand why there is this sudden leap to considering earnings when identifying those available for advice. 

To do this we need to look at what is coming in from 1 January 2013:

1.  Clients need to agree to a new charge called adviser charging – this can be a flat fee or a percentage of the investment. This is not in addition to what they are currently paying
2. This new charge must be clear and transparent and clients need to be aware what they will get for this service

So for example if you had £100,000 in a pension and you are currently paying your financial adviser / planner 1% a year this is paid out of the investment each year. In many cases this is fully transparent already and you are fully aware what service you receive for this fee.

From 2013 this 1% becomes an adviser charge, so actually there is no fundamental change. Confused yet! I was initially but then I realised all of this goes a little deeper. If you have agreed a fee of 1% with your adviser / planner, you can see that charge coming out of your investments and you know what your service proposition is then there is no change. 

The change may come from the fact that the adviser sets a limit on funds which are profitable to the business so perhaps £100,000 but in reality they probably will have already excluded unprofitable clients.

So why the focus in the report on earnings? Within the report I noticed that actually some advisers are charging the following:

1. A retainer fee for their services – this seems to vary but can be as low as £30 per month to £100 plus per month
2.  My thoughts were if you were charging a retainer fee or any fee then there would be no other charges. So by that I mean you pay the retainer then an hourly fee of say £190 per hour (rates charged by some banks). In reality some planners charge a retainer fee plus a management or investment charge which can vary but typically sits around 1% a year

So in reality if you have an adviser that charges a retainer fee than the salary becomes an issue depending how that retainer is taken. But it made me think the papers print confusing messages about fees, reports seem to favour one route or another and all of this makes it really difficult for individuals but cutting through this:

1. From 1 January 2013 your financial adviser needs to clearly outline their fees to you
2. These fees can be taken from your investments, so you don’t need to physically pay the money
3. Your financial adviser / planner has to clearly outline their service proposition and you need to agree whether this is worth the fee you are paying

When you consider the final point the report highlighted what the individuals surveyed considered as demonstrating fair value:

1. Financial advisers / planners who demonstrated an immediate and deep understanding of individual clients and their needs and are committed to acting as a ‘trusted’ adviser
2. Have a strong focus on pensions and / or enabling clients to achieve a secure retirement
3. Are proactive in portfolio management and alerting clients to market and financial events that may affect them 
4.  Can demonstrate measurable results and benefits to clients

In summary for many individuals there will be no change but others may find themselves cut adrift. Surely this is the message the industry should be printing.

Financial Planning is like training for an Olympic Medal

I have been away in France for two weeks. When we go away we switch off from the outside world so for us the Olympics have passed us by. However, over the last couple of days we have really immersed ourselves in the Olympics and it has been amazing to see all the medals.

We watched one race and post-race interview and it made me think that financial planning is like training for an Olympic medal. After the race a young 22 year old runner said that he was delighted to have come fourth but actually his focus was Rio in 2016 when he should hit his peak.

This struck me as a very mature attitude. To achieve his goal he cannot just sit at home and put his feet up he needs to formulate a plan and stick to that plan. The plan may have to be adjusted to reflect unexpected events but ultimately the goal will always remain in sight.

Financial planning is no different, there is no point paying money into a pension, ISA etc without an idea of what the goal is and then once you have that goal you can then formulate a plan to deliver that goal. The problem is that many people have no real goal and therefore no plan. They pay into a pension or ISA and are disappointed with the outcome because they have unrealistic expectations. The simple reason why they have unrealistic expectations is because they had no expectations in the first place and therefore any result will be disappointing (i.e. no goals and no plan will ultimately lead to disappointment).

So watching the Olympics makes me think why financial planning should be considered in the same way. To achieve greatness you need a goal, and you need a plan, and you need to stick to that plan.