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Neil Liversidge: The true victims of the advice gap

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Citizens Advice recently published a report claiming almost half the UK’s adult population – 23 million people – would have taken financial advice at key moments of their life had it been on offer.

It found a third would take advice on starting work or changing jobs, a quarter when buying a home and 37 per cent when going through a divorce or separation. Three million would have taken free advice in the last two years had they known where to find it and 5.4 million would supposedly consider paying for it were it cheaper.

So what? Most people will take anything if it is free, whether they need it or not. Being free only guarantees it will be less valued than it might otherwise have been had it been paid for.

To meaningfully quantify the advice gap we need to identify who falls into it and why. I would say there are four distinct groups but in reality only one of those are truly gap-ites.

The first consists of those who will never be helped because they are lazy and feckless. Sensible advice for them boils down to “stop spending your money on Special Brew, takeaways, fags and Sky TV and start buying food down the market and preparing it yourself”. They will ignore it, however, because it is not how they want to live. They are not victims of the advice gap.

Then there are those who can afford to pay for advice but just do not want to. This is the constituency to which the Daily Mail panders: Victor Meldrews who have the Financial Ombudsman Service on speed-dial. They will grab with both hands anything free. But they are only part of the gap because they choose not to pay for advice. Should we be subsidising them? I think not.

Third come the poor but responsible. With them I sympathise. They manage their money as best they can but just do not have enough. Spending less is not a realistic option. The cost of housing and travel to work is a significant proportion of their budget. They have nothing left to save or invest. Some in our industry deny they exist. They do: some are my friends and neighbours. They are not, however, part of the advice gap because advice will not become relevant to them until they have surplus income and capital to require it.

Only when they rise into group four will they become the true victims of the advice gap. Perhaps they will want advice on putting away £100 per month. In the days when an adviser could earn £500 upfront for setting up some sort of regular savings plan they were perhaps just worth advising. Now they are not.

Time was when we turned nobody away. Sadly we are now often forced to. If the regulator really wants to fill the advice gap, then it should permit a limited reintroduction of commission.

If it is not prepared to do that it should stop expecting advisers to solve its failure embodied in  the RDR that created it in the first place.

Neil Liversidge is managing director of West Riding Personal Financial Solutions 

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Comments

There are 18 comments at the moment, we would love to hear your opinion too.

  1. Neil, you are spot on Sire, I congratulate you on the succinct & totally objective take on this hoary matter. Will your (our) views prompt a shift within the target audience? I fear that may be wishful thinking, but at last there’s an honest-to-goodness assessment ‘out there’!

  2. With you on the true extent of the advice gap and your argument right up until the point about reintroducing commission. Advice on putting away £100 per month (or paying down debt, or providing protection cover) can be delivered via online systems at no cost

    • I cannot imagine IP or CIC being suitably distributed via robotic techniques. More to the point, these products have to be SOLD to clients something a remote centre cannot achieve

  3. Good points, Neil.

    I note with interest your comment re reintroduction of commission because this is what Garry Heath and Libertatem have been arguing for since July.

  4. I don’t think a re-introduction of commission is a very good idea. However, a list of ‘safe’ products that could be recommended without full KYC requirements and liability could mean that you could charge a sensible fee for a regular savings plan and make it profitable. A savings plan could easily fall into that category and because it didn’t pay commission the client would have penalty free access to their money meaning that the only advice risk is really on investment risk.

  5. Splendid article Neil – except for the last two paragraphs. These people can not only afford advice they would be better off paying for it. A reasonable up front fee and then if an investment – an annual funds under management charge. Cost effective and much better than commission.

    When will everyone finally accept the obvious and apart from anything else commission makes you the agent of the provider – not the client.

    If those in your section of the gap understood that financial advice came with a fee – just like their accountant or solicitor this continued harping of commission would finally die away.

    I have never had a problem charging fees and not all my client have been wealth and many fell into your own definition. It is just a matter of explanation. indeed I even charged fees for life cover and was able to clearly demonstrate how much more cost effective that was than commission. (Or CAR for that matter).

    Come on everyone, be brave – you can do it.

  6. PS.

    And of course the other side of the coin is that we should no longer be transactional. The client pays for the advice – whether or not he/she buys a product. How many times have you come away empty handed if the client doesn’t buy? That is neither a way to run a business nor is it in my view professional.

  7. Neil hits the nail square on the head again.

  8. Christopher Petrie 13th November 2015 at 10:22 pm

    £500 commission on a £100 per month plan means £500 of charges, however they might be hidden.
    5 months premiums just to pay advice costs plus the product cost in addition is unlikely to give a good value savings scheme over 5-10 years.
    Auto-enrolment is a more successful way of getting people to save as the figures are starting to show.

  9. Well hurrah and hussar !

    And to those who believe commission should not return, think on this; you do not have to take said commission ! you have the option to re-track this back into the investment, and you charge your fee accordingly or how you wish to be remunerated if at all !

    The commission is there for the people (not the adviser) who cant or haven’t got the funds up front !

    Be my guest, and work out the cost of delay for 1 year on a £100 per mth pension full term. assuming some one has to save up to pay you fee ! or you take the first years premiums spread over 2/3 years !

    Comms should there for regular premiums alone !

    I will be honest and say I have not taken commission (except on protection stuff) coming on for 10 years now ! so it its not a big deal I would still work on a fee basis, but that does not mean it should NOT be a option for some ! but then I haven’t taken on a new client outside of a personal recommendation for 7 years !! so those (if I take them) wanting my services know exactly, how much I charge and what they will get in return.

  10. There is no shortage of people who willingly ‘invest’ north of £150 a month into a new car (a depreciating asset) and who accept that by so doing, they are also paying an ‘undisclosed’ four figure sum to the trader, but these same people will not pay for investment/savings advice where every aspect of the product and sale is broken down in cost terms (even if it is initially pricey, as the advice is paid for out of the first year’s premiums).

    Why do they prefer to do this? Well they would probably argue that they can see, touch and drive their car and it makes them look and feel good, after all, ‘you’re only here once’. A fair sentiment that we can all relate to….Until we hit 50 and realise that, as we had hoped, we are going to be on this planet for a while longer.. But there is a rub, we have no savings!

    The answer? Well a savings plan at any price would be better than nothing at all and certainly better than a car which is, in most instances, a liability and not an asset anyway!

    That’s the problem with your advice gap…People’s perceived priorities for their income and who are we to change that?

  11. It’s not about hiding charges, it’s about facilitating them in a way that is efficient for the adviser and affordable for the client. Old style commission on regular premiums was not perfect but it worked. Instead of ironing out the abuses the baby has been thrown out with the bath water. I am amazed, however, that Vaughan Jenkins above says advice “can be delivered via online systems at no cost”. So who built the online systems then – fairies? Who paid for them? Santa Claus? Charges are being hidden in that system, because SOMEBODY else paid for the cost of delivering that advice. Interesting that the regulator doesn’t mind that form of cross subsidy!!! One way or another somebody has to pay for everything. Right now ‘free’ all too often means that the cost is dumped on advisors via levies and regulatory costs. I set my business up on a fees model in 2004 and it has worked very well ever since, but part of the original model – which worked fairly for clients – was facilitation on regular premium pensions. Nothing is ‘nil cost’. If you got something that is, somebody else paid for it.

  12. We are going on and on, but commission is death for the best part of the last three years and I do not think anyone wants it back, either the clients, nor the providers.

    There are no providers interested in setting £100/month plans, although it may be still possible. This is mainly because this business is not profitable for providers.

    The new MiFID rules will ban commission on the continent for IFAs. The world has moved on and we need to move with it.

  13. Well said Eugen.

  14. Harry, the people in the gap don’t have accountants and they only have lawyers when they’re buying a house. There is a world outside leafy wealthy north London, whether you’ve been there or not and a lot of the people in it actually want transactional advice.

    • As you know I have also lived in leafy Manchester and as you say there well may be people who want transactional advice, but that doesn’t mean they won’t pay a fee if charges and costs are fully explained. I never had anyone refusing the fee route once it was all explained and they could plainly see that the fee was less than the commission.

      As for the much lower end of the market – I say yet again that isn’t (or shouldn’t be) the a market for the independent adviser. With all the associated costs and due diligence involved it is surely impossible to make a profit from this sector with or without commission.

  15. You don’t need commission to spread your advice payments over a long while; you just need to agree that with your client. Of course, your client’s probably a far worse credit risk than the product-flogger who used to bribe you – oops, that should read pay you commission – to sell their wares.

    Advice is advice. You give it, you get paid for it. If you’re prepared to write that cost off if someone doesn’t follow it by buying something you’re not just “not an adviser”. You’re also “not a businessman”. If you believe that financial advice is a social utility that everyone should have access to, set up a charity to do that; if you’re in it for profit, be honest and be commercial.

  16. An excellent article Neil. I have mixed feelings about the reintroduction of commission on regular contribution investment business, mainly because that commission has to be recouped from the product, which poses a tricky balancing act between the interests of all parties.

    As my business, my client bank and my recurring income stream are all now mature and stable, I can afford to take the long view with new clients, particularly younger ones who don’t have much spare cash to meet big fees. But many advisers can’t, so perhaps there really is merit in your idea for a carefully considered reintroduction of commission on regular savings contracts (primarily pensions, of course, as endowments are now all but extinct and we’ve never had indemnity commission on ISA’s). But would this not have to mean a return to capital units and unwelcome penalties for early cessation of contributions? If so, I can’t see the regulator sanctioning it ~ can you? It would fly in the face of the regulator’s sacred RDR and, as such, they’d probably fight against it tooth and nail.

    Then again, would capital units really be so bad if they could mean the difference between somebody embarking on a pension plan and not doing so or relying solely on an AE scheme? Provided the government, by removing tax relief on contributions, doesn’t kill off what little remains of the wider public’s appetite for pension saving, commission could be the lesser of two evils.

    Then again, a simplified/streamlined advice process (Proposition, Costs, Risks & Tax) would probably help immensely as well by removing much of the large upfront costs of setting up a new savings plan of any sort.

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