A wealth of advice

I have been reading a great deal of press comment recently, about depolarisation and the benefits of using an independent “financial planner”who would be prepared to work on a fee basis rather than take commission from product sales. Can you explain to me how this works and how I would benefit?

Depolarisation came into effect on December 1, 2004 and all firms have six months to decide on their business model.

Much has been said about whether it is better to use a fee-based adviser or a commission-based adviser but the real question is whether you want to have a relationship with a transaction-based adviser or an advice-based adviser.

As the majority of financial products have become highly commoditised and pretty indistinguishable from each other, it is difficult to see how product selection adds a great deal of value to the financial advice process.

Equally, advice, by definition, is not related to the sale of any particular product or financial transaction and can only be independent if the client pays for it.

Most advisers still rely upon the payment of commission, after the successful sale of a product. To encourage action, it will be necessary for the product to be portrayed in a favourable light to ensure acceptance whereas the truth may result in failure to act.

For example, the truth about adequate retirement provision is that it requires substantial saving if a lifestyle is to be maintained.

The amount of saving this requires can discourage many people from taking action and this leads to a non-productive relationship between the adviser and the client.

We believe it is vital that the remuneration method is independent from the acceptance, or otherwise, of the recommendations and for this reason we only offer a fee-based service. We are free to ensure that we can independently advise on the likelihood of the achievement of any objective since this is the benchmark against we will judge our success. We must work with you, not only to identify clearly and focus on your objectives but we must also encourage you to ensure they are realistic and achievable.

Most clients have some understanding of their objectives but have little appreciation of the likelihood of those objectives being achieved or what would be considered a successful achievement.

Objectives are often expressed vaguely, such as, “I would like to enjoy a comfortable retirement,” “I want to ensure my estate is protected against inheritance tax” or”I would like to ensure my family is protected in the event of my death.”

These are indications of the objective but fail to establish clearly the necessary detail and most people do not understand or appreciate the linkage between them.

An objective, such as a comfortable retirement must be quantified and a timescale set. When do you want to retire? Will this be immediate and full retirement or should you phase in your dependence on your investments while working part-time? What do you consider to be comfortable? This will need to be quantified and related to your desired lifestyle. All these are individual issues and take a considerable time to develop and agree.

Many objectives will conflict. If your aim is to enjoy a comfortable retirement, this reduces the prospect of protecting your estate against inheritance tax. Both objectives can be valid but the balance between them needs to be resolved and fully understood by you, and us, in ensuring we meet the objectives set.

It is also important that objectives are realistic and achievable. Here, the traditional method of delivery of financial services products creates further conflict.

Only clients who have achieved a certain level of financial security and who are in the wealth preservation or wealth transfer stages of their life are likely to want to pay for advice which centres on financial planning, asset allocation, investment planning, tax planning, risk management and estate planning.

The rest of the population are in the wealth accumulation stage and are striving to accumulate wealth through investing in various long-term savings products. These people tend to be transactional in their behaviour and are probably more suited to a commission-based transactional adviser, who could be whole of market or not.

With the ending of polarisation, we believe it is important to give clients a choice of models, as it is apparent that it is not the case of one size fits all.

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