For many years a big part of my job was promoting Independent Financial Advice. In fact I worked with IFA Promotion (nowadays more commonly known as Unbiased.co.uk) for about 13 years. Personally I am a big believer in financial advice and indeed use an IFA myself. Sadly, despite the undoubted effectiveness of IFAP and its PR and marketing campaign for unbiased.co.uk in both educating consumers about the benefits of indepedent advice and in getting growing numbers of people in front of IFAs, I don’t believe that over those 13 years there has been a lot of growth in the total numbers of people seeking financial advice.
For all of those 13 years the same debate has raged. How can we get more people to take financial advice? The industry, governmental and regulatory logic goes like this. As a nation we need people to take responsibility for their own finances. In particular we need people to save more, especially long term savings, so that they don’t fall back on the State, or live in poverty, in later life. Regression analysis of the stats shows that people who take financial advice save more. So if we can just get more people to take financial advice the long term savings problem will be sorted: QED.
Sadly, I fear that the experts are confusing correlation with causality. People visit advisers because they’ve already decided to save more. They don’t decide to save more once they’ve seen an adviser.
No, for most people there are six good reasons NOT to take financial advice, independent or otherwise:
- It takes a lot of time. Let’s face it, for most of us life is busy. We work long hours and leisure time is precious. So the idea of spending, say, a half day off work, an evening or a Saturday morning with a financial adviser does not appeal. And most people know that a full fact find is going to take at least an hour and quite possibly longer. It’s about as much fun as an extended trip to the dentist.
- On top of this people realise that there is going to be a lot of (very dull) paperwork. In fact as soon as you see any sort of adviser they start to bombard you with reams of the stuff. Multi-page (and very confusing) attitude to risk surveys, and endless regulatory gumpf and disclaimers.
- Visiting an adviser also requires an almost superhuman amount of organisation. First there are those KYC checks – which mean digging out the passport, or driving licence, finding utility bills and so on. Moved house recently? You’ll need details on the old property too. And you are going to need to have details to hand – what financial products do you already have? How much is left on your mortgage, what life insurance have you got? How much have you got in your savings account? For most of us this is going to mean rooting through, at best, a lot of files and, at worst, piles of paper.
- An adviser is going to ask you a lot of difficult questions. When do you think you might inherit? What age do you want to retire? How much do you to live on when you retire? Unless you are close to retirement its very hard to find an answer that is anything but glib. Life insurance is even worse – full of questions along the lines of “have you ever visited the doctor in the past five years – if so give full details”. How on earth would I remember that?
- All financial advice is essentially the same. The reality is that for everybody (except perhaps the very wealthy) you are going to be told to spend less and save more. The trouble is that people already know that this is what the adviser is going to say before they walk in. Which is why they have already decided to save more before they even make an appointment with an adviser. If they haven’t the any advice is pointless as people have to be ready to give up spending on something to free up cash for saving.
- There’s no incentive. Pretty much all the benefits of visiting an adviser accrue over many years. Sure, there’s a warm (perhaps even smug) feeling of know that you get run over by a bus on the way home your wife can live like a princess. But otherwise its all gruel now and jam tomorrow. And when it comes to, say, a foreign holiday today or jam tomorrow most people apply a pretty fierce discount rate.
So what’s to be done?
Well the RDR isn’t the place to start. Yes, making advisers more professional is a good thing: more and more IFAs have become fee charging over the past few years because they realised this. There’s no doubt that people who do use advisers already will benefit, but I don’t believe it will change the habits of the majority that don’t. Next year the new National Financial Advice Service is due to be launched by the Consumer Finance Education Body. We are all promised a free annual check up. My fear however, is that for most people this will become like the annual visit to the dentist: about as much fund and inevitably we will all leave having been told (the financial equivalent of) we really need to floss more.
The sad fact is that however much financial advice you offer people need to want to save first.