£45,000 to invest? Don’t expect advice

Anyone who has less than £50,000 in disposable assets may end up unable to get professional help with their investments under new rules aimed at making the financial advice market fairer and more transparent, reports The Telegraph.

Advisers admit that it will not be profitable for them to provide advice to these investors after the changes brought in under the Retail Distribution Review (RDR). In a survey commissioned by Allianz Global Investors, two thirds of financial advisers said such investors could lose out if they were not prepared to pay upfront fees – which may not be cost-effective on relatively small investments.

So what is the Retail Distribution Review? The RDR comes into force on January 1 next year. It will ban advisers from taking commission and ensure that anyone advising on pensions and investments takes additional qualifications.

Advisers who cannot meet these requirements will not be able to call themselves “independent”. But many have raised concerns that stricter regulations will alienate less wealthy investors.

“I am broadly in favour of the RDR,” said Lee Robertson, a wealth manager at Investment Quorum. “However, the drive to remove commissions, even when properly disclosed, means that many may end up missing out on access to financial advice due to an inability, or unwillingness, to pay explicit fees.”

Currently, many advisers claim to offer “free” advice – customers do not have to pay any upfront fees or charges. Instead, the adviser will collect a commission from the product provider if the customer buys one of the recommended funds.

Under the new regime, all charges have to be agreed in advance. Customers should get a simple document that sets out both the advice charges and the charges for managing their money, which will be levied by the pension or Isa provider.

But the upfront payment will mean that many investors with a small pot to invest will simply be priced out of the market. Unbiased.co.uk, the advisers’ body, estimated that anyone with a lump sum of £25,000 to invest would be asked to pay £750 for advice.

Those with more significant sums to invest are less likely to balk at such fees. But recent research by YouGov suggested that the majority of consumers would be willing to pay only about £200 for a complete financial assessment and £40 per hour for advice.

“A fully comprehensive financial plan including all investigation and comparisons is probably something like 16 hours’ work. Using the YouGov data would therefore mean an effective hourly rate of £12.50,” said Mr Robertson. “Even on a transactional basis a standard Isa at a top-end 3pc fee will generate around £330. But with fact-finding, risk profiling, report writing, submission, compliance requirements and implementation, it means an adviser will in all likelihood transact at a loss.”

When the Financial Services Authority (FSA) issued a discussion paper on “A Review of Retail Distribution” in June 2007, the rhetoric was about advice for all. But fast forward five and a half years and the likely outcome of this review is that far fewer investors will get any kind of financial advice.

Nick Smith of Allianz Global Investors said: “Our research indicates that investors with less than £50,000 in assets will have decreased service levels or, worse still, be left with no professional advice.”

It isn’t just the traditional financial adviser who is turning his back on these customers. The big banks are withdrawing from the mass market to concentrate on wealthier clients too.

Six and a half million people have received financial advice from banks and pension companies in the past five years, many of which are now reducing such services. What’s more, the Money Advice Service, which was launched to plug the gap, is widely considered to have failed.

“The hugely costly Money Advice Service is unproven and has launched to unfortunate publicity,” said Mr Robertson. “The FSA seems unwilling to reduce regulatory standards for simplified advice – which is discouraging new entrants. The banks, which were tipped to benefit from RDR after fierce lobbying, are also abandoning a mass market desperately in need of advice.”

This is because they cannot make money out of selling such products if they don’t collect generous commission payments from providers.

Paul Taylor of chartered financial planners McCarthy Taylor said that, ideally, larger firms would meet the needs of larger clients and smaller practitioners would meet the needs of less well-off clients, as seen in accountancy. He said professional bodies could monitor standards required and set higher requirements for advisers involved in more complex cases.

“As we are all lumped together with banks and insurance companies, running costs are high,” he said, adding that advisers with smaller clients were not paying proportionately lower insurance premiums for their own indemnity insurance.

“If we were treated separately and our premiums judged on our lower claims, then costs would be lower, which also would enable us to offer advice for lower fees – at the moment our costs in these areas are inflated by poor performance of non-fee-based advisers and the banks.”

Two key groups of investors will be worst affected: elderly people who have a small pot and a limited time frame, and young professionals, new to investment.

“For those willing to go it alone and who are more confident of their abilities and choices, they can access discounted investment products from a number of organisations,” said Mr Robertson. However, he added that while some will pay only when they want to buy a product, there is a benefit to building a long-term relationship with a financial adviser.

Those who want to go it alone can utilise research available on the internet from reputable fund platforms such as Fidelity FundsNetwork, Hargreaves Lansdown and Bestinvest. These sites provide fund analysis and access to a vast range of investments.
The less computer-savvy can still get access to this research by phone. “For those with smaller amounts to invest it would be worth finding an adviser prepared to work on a retainer basis.

Similarly, there are now some ‘direct to consumer’ platforms offering free advice and discounted transaction costs, such as Money-on-Toast,” said Mr Robertson.

For investors with a smaller amount to invest, who might not have the time or experience to build a portfolio themselves, a multi-manager is an option.

“A multi-manager provides a diversified portfolio, investing across various asset classes, managed by experts whose sole focus is to deliver the investment objective and limit the risks for investors,” said Jeremy Hervey of Cazenove Wealth Management.

“Multi-manager funds shouldn’t be seen as one investment or an expensive route to market, they should be seen as a professional portfolio service available to everyone. Doing it yourself can end up being expensive if it’s not thought through properly.”

Mr Smith agreed. “One option could be multi-asset funds, which are proving popular across the board, and we believe that after RDR we will see a large increase in the proportion of funds that are ‘outcome orientated’, such as target risk funds.

“These funds are appropriate for a range of clients. Crucially, they provide a way for advisers to offer a properly managed ‘outsourced’ investment solution to a large section of their client base at a relatively low cost,” he said.