Reading Andrew Verity's piece in MM last week on the importance of debt counselling in the spectrum of services provided by IFAs, I cannot help but think that his approach is somewhat naive and unrealistic.
First, people with severe debt problems hardly represent very lucrative prospects for any business, irrespective of the remuneration basis on which an IFA may make available his services.
A member of the public with debt problems is unlikely to have available any money to pay a fee or invest in any product generating commission. IFAs are not charitably funded organisations and, unlike the BBC, have no scope for generating revenue by way of statutory licence fees.
Having said that, there are certain generic types of advice that all IFAs can offer free of charge, the first being to direct enquirers to the local debt advice centre, of which we have one in Bristol. Whether or not this is a service commonly available in most British cities and towns I do not know.
The second is a blanket maxim never to gamble possible future investment returns against the costs of servicing debt. Always clear debt first, even if this means running down capital, and start accumulating it again by way of monthly savings.
As for suggesting that articles ought to give “useful advice on the level of debt you can safely afford”, this is clearly ludicrous. The starting point for any discussion on this subject has to be, in my book, that the level of debt for which everyone ought to be aiming is zero.
As for how much debt is “safe” for anyone is impossible to define as it depends as much as anything else on each individual's attitude to debt risk and the vulnerability of their other regular outgoings to rise beyond their control. That is very dangerous territory for any financial adviser.
A client (and friend) of mine, at the age of 52, recently took on a mortgage of £350,000 to buy a house that clearly his wife wanted to own more than he did. To make things worse, the client is a freelance computer programmer and lucrative contracts are not exactly in abundant supply at present. The cost of the relevant life cover is huge (I resisted the temptation to take indemnity commission on that one).
He also has monthly payments on his car of £270 and has had to suspend funding his pension. Currently, he is on a three-month contract in West London which is costing him 1,000 miles-worth of petrol every month and £500 a month for his accommodation. I told him before he made the move that he was crazy and that he ought to stay put but he went ahead anyway. What can I do if it all goes horribly pear-shaped?
The principal reason for the unmanageably huge debts accumulated by some unfortunate and/or irresponsible members of society is irresponsible lending practices such as the growth in the sub-prime, self-cert mortgage market and the incredible ease and speed with which one can accumulate credit cards.
Those issues are neither my fault nor responsibility. If anyone seeks my advice on debt (before they get into it), my answer would be very simple – exercise self-restraint and personal responsibility for your own actions. Or, if you can't afford it, then don't buy it.
WDS Independent Financial Advisers, Kingswood, Bristol