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Gregg McClymont: Why are savers reluctant to pay for advice?


I have no idea what financial advice is like in Northern Germany but as the Financial Advice Market Review rumbles towards a close this side of the North Sea, one is increasingly reminded of Lord Palmerston’s famous aphorism: “The Schleswig-Holstein question is so complicated, only three men in Europe have ever understood it. One was Prince Albert, who is dead. The second was a German professor who became mad. I am the third and I have forgotten all about it.”

At first it all seemed so simple: give people the right to access their pension pots from age 55. However, the new freedom brought with it new responsibilities, not least the duty to ensure investable assets deliver an income in retirement that lasts a lifetime. To achieve this reliable retirement income stream without buying an annuity means investing in the markets via drawdown.

Put another way, pension freedoms have utterly changed the risk landscape in the mass affluent market. Having created this new framework, the Government now wants to mitigate the risks to the consumer. Thus the FAMR.

In its call for evidence the FAMR sought information on “the extent and causes of the advice gap for those people who do not have significant wealth or income”.

From the adviser side of the equation several solutions to the advice gap have been proposed, from reduced qualification requirements and regulatory safe harbours or sandboxes, to the reintroduction of limited commission as a means of overcoming consumer resistance to upfront fees.

These supply side remedies are often explicitly or implicitly proposed in the context of rapidly developing digital technologies – the ubiquitous robo-advice, assumed to offer economies of scale such as to significantly lower advice firms’ overheads on a per client basis.

In the meantime – and even before the FAMR reports – some high street banks have announced their own supply side cure: their return to an advice market exited not so long ago in the wake of fines and regulatory interventions.

It is possible to raise objections to each of these responses. The service offered by banks could arguably be defined as product sales rather than independent financial advice. Safe harbour has been construed (in other quarters) as legitimising inappropriate advice so long as the underlying product is held to be satisfactory.

Meanwhile, reduced qualifications for advising on simple products raises the issue of line drawing. What precisely constitutes a simple product and what are the implications of creating a two-tier system of independent financial advice? As for robo advice, will it ever replace the need for the human interaction inbuilt into regulated advice and financial planning?

Some of these arguments are stronger than others. But a more fundamental objection is possible, one which challenges the existence of a supply side deficit at all. Leading the charge is the FCA Consumer Panel. In its view, regulated financial advice is no different in character than other professional services for which there is lesser or greater demand.

For example, accountancy services are accessed by some consumers but not by others, yet there is neither talk of an accountancy advice gap, nor claims the price of accountancy services is excluding consumers. The Consumer Panel sees no evidence of pent-up demand for advice in the mass market.

The advice gap is a fiction, it concludes.

This is possibly going too far. But focusing on an absence of demand – rather than simple undersupply – does encourage a more rounded view of consumers. It opens up a debate about factors that inhibit consumers beyond the purely financial or economic.

Let me mention just one: culture. If neither you, nor your family, nor any friends have ever taken regulated financial advice in your life, then it is a big step to do so.

It means confronting financial realities that you might rather not confront. It means gathering together all those bits of paper you have stuffed in a box at the back of the cupboard because it is just too hard to think about. It means laying bare your financial circumstances before a stranger. It means thinking about getting old. For sure, there is a whole lot more to the advice gap than the cost of advice.

Gregg McClymont is head of retirement savings at Aberdeen



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There are 8 comments at the moment, we would love to hear your opinion too.

  1. Typically, a financial adviser will be remunerated for pension advice via a fee charged to the client’s pension fund after the transfer has taken place. This happens because very few people are willing to pay a fee up front (plus VAT). Particularly if the advice is to stay put because their existing pension is suitable.
    However, if the investor who makes a transfer then complains to the Financial Ombudsman Service, the Adjudicator will probably find against the IFA because that adviser was financially incentivized to recommend the transfer, and was therefore biased.

  2. Has Gregg Mc ever paid for advice should be the question. If not, then why not? Does he think he knows it all as if so he’s the sort of client advisers DONT want.

  3. Douglas Baillie ~ I see what you mean, though for the past 15 years I have insisted on virtually all (potential) new clients paying at least something (currently about £200 for most stuff) towards the costs of my pre-sale (oops, sorry, pre-implementation) work, as a gesture of serious intent to engage with the advice process. Those who won’t pay even a nominal contribution are almost certainly time wasters and not worth pursuing as clients.

    That said, every now and again I do pre-sale (typically pension fund vesting) work at no charge for clients who genuinely cannot afford even a modest fee.

    • Like you Julian we always charge a pre-implementation fee for new clients. It stops the accusation of biased and shows commitment from the client. Like you said it also separates the time wasters before any work is started I have found. Never had an objection.

      Ironically when I mentioned this to our network T&C officer they said I was a minority doing that which did surprise me. Seems you and I are the odd balls!

  4. “pension freedoms have utterly changed the risk landscape in the mass affluent market”

    A quick look over the fence may tell you that these ‘freedoms’ are a passing phase. When (if?) interest rates go up (as well they may if our currency sinks further) then annuities will become a ‘no brainer’. Even now for a joint life 100% spouse’s pension the rate is around 5.5% for a standard annuity. This translates to at least 7.5% in drawdown when all fees and charges are taken into account if the value of the fund is to remain secure.

    Please bear in mind that the better off have other assets beside their pensions. £350k each husband and wife in ISAs is by no means unusual. Many have investment property. So they have risk exposure outside their pension. The annuity provides safety and certainty, avoids the hassle of on going advice, reviews and worries of the market. It also happens to be pretty IHT efficient.

    As to taking advice, well I don’t know where you have been looking, but in my own experience there is no shortage of those with decent assets willingly paying fees for decent advice. It’s all about being cost effective and drawdown is currently not exactly that!

    The only drawdown I ever did was for PSCLS and no income. That’s not to say that in rare instances drawdown might be the best solution. However that’s a bit like a tailor stocking a jacket for a hunchback in the hope that one walks through the door to buy it.

  5. Harry is not comparing like for like at all.
    Drawdown has been painted in a very poor light and as he says assume not to diminish capital for comparison yet he is comparing with an annuity where on the death of the second life all of the capital has gone. It could be argued all of the capital is gone from day one on his favored annuity.
    For me and I think for many the drawdown has substantial merits not least the ability to call on some capital or maybe gift. I find his black and white approach somewhat extreme.

  6. To follow the example another school of thought would be that a couple with 700k in Isa’s don’t need the security of annuity on a pension 🙂
    They are sufficiently wealthy not to have to bother with an insured arrangement.

    • Peter
      Addressing your first point. ‘On second death all capital has gone’. So what? What you’re dead you’re dead. The purpose of a pension was never to hand it on and as I mentioned it is pretty IHT tax efficient.

      Second point. That may possibly apply to clients in your experience, but in mine the richer you are, often the less risk you want to take. The annuity forms a balance in these situations.
      I concede that some might not agree with my points, but we all advise as to what we think is best and what we would do ourselves. I crystallised my and my wife’s pensions just for the PCLS as I don’t trust the numpty in No. 11. Eventually we will purchase annuities before age 75. As we get older the rates improve and not that I’m looking for it – we may qualify for an enhanced or impaired. If we Brexit and Sterling really tanks (remember George Soros?) – interest rates will very likely improve significantly. Meanwhile if I snuff it before the wife – she gets the bundle tax free with no strings.

      Meanwhile we have other assets and have both contributed to Class 3 A voluntary – which gives us a 6.7% return – index linked. But then this doesn’t pay trail!

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