we could suddenly dispense with the costly plumber, electrician, builder etc and do it all ourselves
It’s very easy to think that the Independent Financial Adviser (IFA) is dead and buried, DIY financial planning is very much alive and we now have the ROBO ADVISER…
In fact, all of this is good news for the ‘consumer’ because it means investing is now cheaper and easier.
To some extent some of this is true but behind the headlines something stronger has risen from the ashes.
In this blog I want to explore how something is happening that many are missing.
Independent Financial Adviser (IFA)
Ask most people what the difference is between an Independent Financial Adviser and Financial Adviser and they probably don’t know or care. In fact, my own view of an IFA was that their job was purely to sell you a product.
Once they had sold you a product, and taken the commission it was highly unlikely you would hear from them again (a sweeping generalisation some may say but one many would agree with).
As price came to the forefront, the question was raised as to why you would pay someone to arrange a pension for you when you could easily do it yourself. It’s a very strong argument and therefore the next logical step surely is that the IFA will slowly disappear from the financial landscape.
Personally I think that has already happened.
But What About Advice
As everyone moves away from the IFA to ‘DIY’ it means the responsibility shifts to the individual.
If you are just purchasing a product, then it’s easy isn’t it?
You pick the plan you want and away you go. But where do you go…how many direct propositions are there and which one do you pick? Is it the right one for you? Does it fit your circumstances and future goals?
What happens when you come to choosing the investment strategy and what about when it comes to retirement.
There is a simple solution to this, the birth of:
The ROBO ADVISER
DIY keeps cost down; if you need advice you usually have to pay for it, so how do you keep costs down but get the advice you need?
The ROBO ADVISER replaces a human being and enables you to answer some simple questions, leading you to the best solution; perfect.
Or is it?
Rising from the ashes
Retirement planning is one such complex area of ‘finance’ that can discourage even the savviest of individuals. It can be more difficult than it seems.
If you want a target pension at 65 of £15,000 after tax per annum (increasing each year by RPI and providing a 50% spouses pension) then you would need a pension fund of £600,000.
That assumes you give the money to a pension provider who then guarantees to pay you that amount for life (referred to as an annuity).
But to get that fund you need to save some money. For a 25-year-old they would need to save £1,100 per month gross (according to Hargreaves Lansdown) to achieve this fund value.
And it’s not just about how much you need to save, additionally there are other considerations; pension funding limit, pension freedom and personal financial goals.
Pension Funding Limit
On one hand the government want to encourage pension fund saving so that there is less stress from providing benefits in the future but on the other, they seemingly want to discourage it above certain levels because you start getting penalised.
To explain, currently if you have a pension fund of £1 million then anything above this at retirement will be additionally taxed. This limit, called the lifetime allowance, has been coming down since it was introduced in 2006 however from April 2018 this limit will rise in line with CPI.
Going back to the example if your target pension income is £15,000 net, it is important to consider adjusting for inflation. Over 40 years the equivalent income could be £30,000 net meaning the actual pension fund needed is £1.2 million!!!! However, this is based on current annuity rates which are historically low – though they ‘may’ improve there is no guarantee!
Suddenly not only does it seem unachievable to accrue your pension but if you do, then you are going to suffer extra tax if you go over the maximum limit.
And now we have pension freedom which means you can simply take the income from the pension fund, as long as your pension provider offers this facility.
Using the same example, but using this route you would still need over £300,000 saved to draw down a pension of £15,000 after tax. For a 25-year-old this would cost £600 per month, including tax relief, and this doesn’t reflect inflation.
What Do I Need, What Are My Goals?
It’s a good question. What do I need and when should I review this?
What is the best way to achieve what I need? How do I work out what income I need in retirement?
In the early 2000’s home renovation was everyone’s favourite pastime.
It was liberating because we could suddenly dispense with the costly plumber, electrician, builder etc and do it all ourselves. A few people were very good at this but many were not and spent more money getting someone in to rescue them.
Does that sound familiar when it comes to managing money?
From The Ashes
Many people still consider that financial advice is about selling a product.
This is old style thinking and I would argue the opposite. What we need most is planning!
We are in a very tricky financial world. Gone are the days where an employer’s scheme guaranteed your pension in retirement (unless you have a public sector scheme), so long to the days when we were lucky to reach 65 and therefore didn’t need to worry about saving for an event which was unlikely to last (we can now live 20 plus years in retirement).
Planning for retirement is not as simple as paying some money into a pension and hoping for the best. It is much more than that. It is about drawing up a plan and working out the best way to achieve the end goal, and that is your desired level of income.
Going back to the analogy of DIY and houses, there are some people who are very good with this. These are the people who have a plan, and are meticulous both in the preparation and delivery of what they are looking to achieve. They are also prepared to be flexible in their thinking, so they will bring in an expert when they need one.
Those people who come unstuck are those who think they can do it, but don’t have a plan and are not really engaged in how to implement the plan or carry it out.
The independent financial adviser might not be around in its previous guise any longer (which is actually a good thing as it means the industry has adapted) but the financial planner is something very different and does add value beyond DIY and the ROBO ADVISER.
It might cost 1% a year but if this adds 3% to returns then this is worth every penny. More importantly than returns it is the continued review and adoption of your goals that you are paying for. It is unlikely a ROBO ADVISER can do this as it is not bespoke to you and certainly it is very hard to achieve this doing it yourself unless you truly know what you want to achieve in a realistic way.
There is no doubt that the old fashioned independent financial adviser (IFA) is a thing of the past and the idea of selling a product for product’s sake is gone; if you want that you can use the internet!
The replacement to the IFA is the Financial Planner. It may cost more but it is very different, it is not about the product but understanding what you want and considering the best way to achieve this, by taking your personal circumstances into account – not just by answering a few standard questions. Only then can a solution be found to deliver on your goals.
In summary my argument is that things have moved on for advisers, it is now more about financial planning but it will take a few years before this is recognised. For now, we are still a bit stuck in the past when it comes to our views of what a Financial ‘Adviser’ offers and the importance of that.
It is worth reflecting on this, twenty years ago anyone could do any part of their DIY from electrics to plumbing to building. The result, some very dangerous and shoddy work. Fast forward to today, certain aspects of work require a qualified engineer (electrical and gas installation), and although people are choosing what they want they are getting experts to do the jobs. It is a reflection that saving a bit up front isn’t worth it in the long run. My prediction is that the same will happen when it comes to advice, and there is evidence that this is already happening.
Note: This is written in a personal capacity and reflects the view of the author. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.