Financial products are generally sold, not bought. Barring the occasional ‘desire’ to purchase a mortgage or an ISA, there are relatively few mornings you wake up and think to yourself, “I must buy myself a critical illness policy or some life insurance today.”
Pensions have only recently become a topic of conversation around the dinner table or in the pub, probably due to the number of failing company pension schemes or the myriad of sensationalist fat cat/ public sector Final Salary pension scandal stories in the press. However pensions are a complex subject and excepting a few brave souls who want to thoroughly investigate the various products on offer, most people need a bit of advice in how to go about buying the most suitable product for them. And let’s not start on annuities…
It’s at this point that independent financial advisers have traditionally stepped in to provide expert advice and point us financially near-illiterates in the right direction, providing guidance on savings, investments, mortgages, protection, tax and life insurance. And in the process doing pretty well for themselves, it has to be said, through commission from providers for selling their products to clients.
You just need to look at the New Model Adviser weekly profiles of IFAs and the near total predominance of BMWs driven (whilst ignoring their frankly appalling MOR in-car stereo tastes that have ranged over the years from Level 42, Sade, Oasis to today’s Florence & the Machine).
However, the landscape will change on 1 January 2013 with the onset of the Retail Distribution Review (RDR) when advisers will have to outline their charging structures based on the level of service they provide, since they will no longer be able to receive commission set by product providers. The prevailing thought goes that if an IFA is genuinely independent then they shouldn’t be swayed by sales commission – they’ll just choose the best product for their client. But if paying commission didn’t work, then why would all the product providers spend so much money on it? On the adviser side, we won’t mention the forbidden word “churn” (but leave it for another day).
Some industry commentators have complained that consumers won’t be willing to pay for financial advice once they ‘realise’ it’s not free. For a start, people already pay for their financial advice – they just don’t realise that you are paying through the commission being extracted. But this is more painless than in the future new world, where the IFA will tell you what he is going to do for you and then say “For the advice I’m about to give you, let’s start up a direct debit for £100 a month.” No thank you very much! My opinion is that if I can’t afford the fees, my financial situation doesn’t warrant the services of a professional adviser.
However, without an adviser, like the majority of people – what are the chances that I’ll choose the right pension, make the correct investments for my situation, let alone the right amount of life protection? We are more likely to buy financial products and keep them for a longer period of time because we trust the person who is recommending them, but with the likelihood that the majority of people not being able to afford it, coupled with a rapidly reducing number of IFAs, we will see the emergence of an “advice gap”. We’re in a bit of a quandary.