Financial advice ‘too expensive’ for most Britons

Despite a rise in adults receiving advice, most people consider it too costly, FCA review shows.

Commenting on the publication by the Financial Conduct Authority of its evaluation of the impact of the Retail Distribution Review (RDR) and the Financial Advice Market Review (FAMR),  which shows 1 million more people received financial advice in 2019 compared with 2017, up from 3.1mn to 4.1mn;

Becky O’Connor,Head of Pensions and Savings at interactive investor, said: “The FCA report shows that more than nine in ten - 92% - of UK adults have not received financial advice, despite a rise in the last two years. 

“According to the FCA, people mostly say they don’t take advice because they don’t need it. But the other problem with the uptake of financial advice is simple: it’s just too expensive for most people and so it doesn’t reach many of those who could benefit.”

The Review found the average initial advice charge was 2.4% (Point 3.24 FCA Review). This equates to £240 for advice on how to invest £10,000. There’s a further average 0.8% a year ongoing advice charge. Taking into account advice and charges, the FCA said customers pay an average 1.9% a year.

 On concerns over consumers holding too much cash

On concerns that “many consumers are still holding money in cash that could be invested to provide potentially higher returns” (point 1.21 FCA Evaluation);

Moira O’Neill, Head of Personal Finance at interactive investor, said: “There can be many reasons to hold cash when investing. The key is to be clear about your strategy – is your cash there to de-risk your portfolio, as an opportunity fund or are you holding it because you can’t find suitable investments? 

 “If investors don’t hold cash, they won’t have the opportunity to take advantage of market falls, which many of investors on the ii platform did this year, or to buy investments on their watchlist when they see value.”

Pension freedoms create greater cause to seek advice

Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “There are advantages to having a good financial adviser, particularly if you are approaching retirement and have a number of old pension schemes and your finances are relatively complex. 

“Pension freedoms have created a greater cause to seek advice for those in their mid-fifties and above, so it has become possible for more people to justify paying for it – and for advisers to have something meaty to advise on, at this point.”

“But people of all ages need to educate and inform themselves as much as possible if they can’t afford advice and frankly, even if they can. You need to have a sense of whether the advice you are being given sounds right for you, after all. And in the end, you may decide you can go it alone.” 

Lack of financial understanding a problem for young workers

 Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “It’s better to prevent mistakes by getting your finances right early on than it is to correct them later, so younger adults do need reliable sources of information and help, but they haven’t yet built up or inherited the assets required to justify an adviser’s cost or time. 

“Time and again, younger people are turned away from financial advisers because their need does not justify the high level of support on offer, which can be frustrating.”

 Interactive investor this week published a research report, which shows worryingly, over a fifth of 18-34-year olds with life company workplace pensions are in low risk pensions, demonstrating a lack of understanding of risk and investment growth among younger workers that could seriously dent their retirement prospects.

The research also uncovered a lack of awareness of ‘lifestyling’, where risk reduces as you approach retirement.

Becky O’Connor, Head of Pensions and Savings at interactive investor, said: “There are plenty of resources out there on how to invest, how to assess risk, how to consolidate pensions and how to identify scams. But there is a need for more targeted financial education and tools, to boost the nation’s confidence around dealing with their own finances.

“Even with great guidance provision, generic information can only go so far towards helping people sort out things like pensions for themselves. That’s because financial circumstances can be as unique as our fingerprints – and so can require a more tailored approach – whether we choose to do this ourselves or with an adviser.

“There’s also a need to improve understanding of the difference between guidance and advice, as many people get the two confused and think they’ve received advice, when they haven’t.”

 As part of its Great British Retirement Survey, interactive investor recommended ‘wake-up packs’ that coincide with major life events should be distributed, for instance, when someone starts their first job, or at the birth of a first child. It also suggested financial education be delivered not just in schools but also in the workplace, by employers. Interactive investor also supports the idea of free online “wealth courses”, run by the Government.

On FCA calls for innovation

On innovation around service types and product costs, Moira O’Neill, Head of Personal Finance, interactive investor said:

“Most of the industry clings to an old-fashioned percentage fee charging structure, which is essentially a wealth tax, penalising customers as their wealth grows.

“It doesn’t have to be like this. You don’t get charged for getting fitter at the gym, and no other industry charges people more based on their bank balance.

“interactive investor’s flat fee structure has allowed us to innovate as well as provide value for money.

“Last year, we replaced our flat quarterly fee with a flat monthly fee, enabling customers to choose a more tailored approach that suits their needs with three price plans so that customers could chose a service that best suits their needs and create a more personalised service.

“The Investor service plan (£9.99 per month) saw us reduce our trading costs (from £10 to £7.99), with customers receiving one free trade a month, and investment trusts, Funds, ETFs and UK and US shares all priced the same. This year, we introduced free regular investing and slimmed down our rate card further, scrapping a raft of charges, particularly around our SIPP.

“We’d like to see more innovation across the industry – and innovation that puts consumer interests front and centre.”