27 October 2016
We need a Financial Health Service
Financial advice should be as accessible as healthcare
by Frank O’Nomics
If you are ill, you have the right to visit a doctor, taking advantage of an NHS which is free at the point of delivery. This is a right which, despite the claims of those who think the government is trying to undermine it, is generally unquestioned. However, if you are struggling to organize your financial affairs, whether that be the selection of the right mortgage product, the right savings plan or the best course of action with respect to your pension, there is no easily accessible source of unbiased advice. Why should we be able to get help for our physical and mental well being and yet not have the same recourse when it come to our financial health? It may even be that issues with the latter – where we suffer stress and illness as result of financial malaise – may save us having to call on the former. The bigger question here is not just cost, it is about why people are not engaged with the financial community, regardless of whether they can afford to pay. This needs to be examined as, without adequate financial planning, we will be left with an ageing society that is becoming steadily more impoverished.
The first step is to ask how people know whether they need advice? There is a mantra that comes out of the older generations along the lines of: spend less, save more, insure the breadwinner, make a will. All of this may make sense to those of a certain age, but does not necessarily mean anything to a younger generation, more likely to prioritise their social life and their ability to buy the latest iphone. Such an approach was acceptable when people had jobs with defined benefit pension schemes which would give them a comfortable retirement, but it is not suitable for the new defined contribution era. Auto enrollment schemes go some way to helping, but the sums generated are pitifully small. The combination of company and individual contributions here typically does not get above 8% of income, when the amount needed to ensure a comfortable retirement is generally a percentage that is around half of the age at which you start the scheme (so 12.5% if you are 25, but 20% if you start at 40). 8% does not compare favourably with those on a defined benefits scheme. To rival them you would have had to have put 20% of income into your pension fund. We are left with a problem where no one is advising those newly involved in defined contribution schemes how much they should save, or pointing them in the direction of those who can help.
The financial services industry has a lot to answer for. Firstly, they have not covered themselves in glory when it comes to levels of trust. There is a long history of unscrupulous advisers introducing clients to products that are not compatible with their needs, but generate high fees for the adviser. This was the case in the 70’s and 80’s with life insurance products, but there are many recent examples; there were allegations last week that some companies were selling inappropriate annuity products to clients with short life expectancies. The Edelman Trust Barometer shows that only 36% of the UK population trusts the financial service sector, ranking itbelow the likes of Brazil, Argentina and Russia. There are ways in which that high level of mistrust can be repaired. Firstly, there is still a great need for transparency in the fees relating to financial products. Saying that annual fund charges are, say, 1%, often ignores a multitude of additional charges relating to dealing costs, custody, etc. The Transparency Task force, under Andy Agathangelou is doing a lot to lobby the industry to change, but there is a long way to go. Greater transparency would engender greater trust and the greater use of savings products. There also has to be more effort into demonstrating that both the financial services firm, and the individuals working for it, are fit for purpose. FCA registration helps, but there is a need to show that higher standards are being upheld. The use of a kite mark should be something that potential investors recognize and understand, and such a thing does exist for personal financial planners in the form of ISO22222, which defines the financial planning process, with the ethical behaviour, competencies and experience all required. However, very few financial services firms have taken advantage of this facility (less than 100), which leaves us asking; just what are the rest trying to hide?
The reason why most financial advisors are not engaging with the general public is that they really don’t see the point. Fixed charges related to setting up and running a client account means that most firms are content to only chase high net worth individuals. The rest are just too expensive, and time consuming (smaller savers are less savvy) to cover. There has been significant progress in giving small investors access to cheap execution facilities – the platform operated by Hargreaves Lansdown has been especially successful – but this is not the same as giving clients appropriate advice. The advent of robo-advice is a supposed solution, but the capabilities remain very basic and are not the same as speaking to someone who understands your particular needs. Going back to the original statement, would people be prepared to accept robo-advice when it comes to healthcare matters? In general the answer will be no.
There are solutions. Firstly, the government can do much more to educate on financial wellbeing within schools. There is a small part of the curriculum for this, but there is a very low level of both knowledge and trust of financial services among sixteen year olds. Public service broadcasting is an underutilized resource, but recent ads for pensions freedom and auto enrollment could be extended further. Similarly, there is a need to help to encourage financial advisers to engage with a lower income cohort. It may be that the lifetime ISA is a start, but it has been interesting to see that some major firms have been reluctant to participate in this at the outset. That may be a fear of future miss-selling cases, or a sense that this will not be profitable business. Encouragement to give pro bono financial advice is also long overdue. There are firms and individuals who do this, but making this a key area of the CSR activities of large firms could make it widespread. It is not something that we can necessarily expect from the Citizens Advice Bureau.
One could argue that financial insurance, or adequate retirement planning, should be as compulsory as car insurance. Otherwise the burden on the state will be just too great. Financial advisers are not, and should not be seen as, social workers. They exist to make a profit, but they need to be regulated so that there is a return to a high level of trust, and there are strong arguments for supporting those who are prepared to look after clients with smaller sums to invest, and potentially give some pro bono advice where it is most needed. The Treasury is preparing a paper on the redefinition of financial advice, and will take responses up until 8th November. There will be no shortage of suggestions from the industry, let us hope that they produce something more practicable than exists currently.
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