Are you ready for January 2013?

The retail distribution review will bring profound changes to the way investors access financial advice, says Tom Bulford. So, it’s vital you learn how to look after your own money.

If you are a customer of Lloyds Bank, are you ready for some good news? The bank will no longer offer face-to-face financial advice. So when you go to the bank to pay in a cheque, you will not be asked if you have considered this, that or the other savings product. You will no longer be invited to discuss your financial plans with the earnest looking young man in the meeting room.

You will, though, only have this blessed relief if you have less than £100,000 in savings – savings known to Lloyds, that is. If you make the mistake of revealing that you have a six figure sum stashed away somewhere else, you can look forward to the full sales pitch. Barclays, HSBC and Royal Bank of Scotland are following near identical strategies, all targeting the wealthiest customers and abandoning the rest.

So why have these pillars of the high street chosen to favour the filthy-rich and deny the more moderately affluent the benefit of their advice? According to Lloyds it is because “demand for a fee-based financial planning advice service decreases when they have lower amounts to invest”. This hardly sounds true. The richer people are, the savvier they normally are about their money. It is those that have just a few thousand that could probably benefit most from some decent financial advice.

Delivering advice in a post-RDR world

Unfortunately for those people, they are being cast to the wind, and the real reason is given in a research paper from Deloitte called Bridging the Advice Gap – Delivering Investment Products in a post RDR World. Deloitte has revealed the startling fact that 87% of customers who purchased a savings or investment product via a bank adviser in the past three years assumed that the process was ‘free’.

Of course it was not free.

The bank would recommend savings products and then take a nice rake-off from the provider of that product. As I have described in two recent issues of Penny Sleuth, this practice is to be outlawed from the beginning of next year. Financial advisers must make their charges explicit up front so that the customer knows exactly how much he or she is actually paying. Based on a survey of over 2,000 adults, most of those customers are “likely to react negatively”. Hardly shocking.

“Customers may be surprised by the high cost of advice” (I’ll say!)… “and they will question its value”. I have had some great feedback from my two previous articles on this subject, but this Deloitte report begs the question – what happens next?


5.5 million customers left to fend for themselves

If you have £30,000 of savings and don’t know what to do with it, to whom will you turn? Maybe some will go to IFAs. The report diplomatically states that bank advisers face “reputational issues” and are seen to be too “sales-oriented”. A good IFA should at least have his reputation intact and could try to pick up some of the business dropped by the banks.

But IFAs, too, are heading up-market to target the rich which, according to Deloitte, leaves 5.5 million disenfranchised customers who “will either choose to cease using financial advice or lack access to them”.

Money does not manage itself. Most people know that sticking it under the mattress is the not the best long-term investment strategy, so they will have to make a decision somehow. It seems inevitable that the first port of call will be the internet. I see two difficulties here.

Firstly with product providers – the big unit trust groups for example who have traditionally relied upon financial advisers to steer business their way, effectively acting as their marketing arm. Now these product providers will be looking to market to the customer directly. But will this simply be a matter of flogging products or will they make any attempt to find out what the customer really needs?

One piece of advice does not fit all

An alternative web-based offering is likely to be a do-it-yourself financial planning kit. You enter your financial situation and aspirations and the computer automatically tells you what is best for you – the machine effectively replacing the earnest young man. As ‘Edward from Portugal’ points out: “according to the best advice rules everyone gets the same recommendation according to the chosen risk rating”.

This prescriptive approach implies that there is one investment strategy that is indubitably correct for any set of circumstances. This is dangerous. Such models are usually based on historical investment returns that are by no means certain to be repeated in the future. And most financial crises arise as a result of people plunging en masse into things that are said at the time to be good for them but subsequently prove the opposite.

I don’t like the sound of it. But one thing is clear. Savers can no longer rely upon good financial returns. They need to wise up and have a basic grasp of different investment products.

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