11th June 2010
The financial supermarket versus financial planning
Traditional financial advice treats you like a supermarket customer
Influenced by traditional financial advisers, most people only buy a financial product as a reaction to a life event. They might move house and buy a mortgage; change jobs and buy a pension; have children and buy life insurance; or they might read in the financial pages of a newspaper that gold funds will grow at 20-30% minimum every year and invest all their money there. This series of uncoordinated events results in a trolley full of policies.
Will you have what you need at the check out?
The problem is there is no form of measurement until it is too late. You reach the check out at retirement and have to hope that you have enough in your trolley to last you through. Or worse something goes wrong on the way to the check out (such as an illness or accident) and you have to rummage in the trolley in the hope that there’s something there to deal with the problem.
This retail service is flawed
Even in the best hands traditional financial advice delivered this way will be at best reactive and almost always result in the sale of a product. In the worst hands this service can lead to biased and expensive advice; with no measurement of how far the existing arrangements will get you towards your objectives.
Advice not products
Because you are buying policies, the people who deliver the traditional advice service to you tend to get paid commission. They get paid according to what they sell. This payment method works in most retail environments. And you might ask why it should not be so in financial services. We think the reason it should not is that most people go to a financial adviser for advice – not a shopping trip.
Problems with commission
Commission-based advice only works because of cross-subsidisation. Clients that buy policies paying big commissions, also pay for all the time the adviser spends with clients that don’t buy or buy smaller policies. This cross-subsidisation is being driven out of the market. Traditional advisers have to compromise themselves or their clients more and more, just to make enough money to keep their businesses afloat.
This cross-subsidy is under threat from financial services companies who can’t afford to play that game any more; the Government who have decided enough is enough and are introducing ways to end commission for investment advice; and wealthy clients who see the conflicts of interest and no longer want to subsidise other people’s advice.
The alternative is financial planning
A financial planning service is more comprehensive and proactive. It equips you with the tools you need for your financial journey through life. Crucially it measures your progress. Financial planning shows you how much to save or spend; to invest or repay debt; how fast your investment needs to grow, the corresponding investment mix and what insurances you need to live your desired lifestyle.
Very often a financial planning service will recommend you avoid or get rid of financial products. This conflicts with commission-based advice.
A financial planning service will not work if it is commission-based. It has to be fee-based so it protects your confidence and trust in the impartiality of the service.
PageRussell can help
We provide financial planning and investment services to individuals, business owners and trustees in East Anglia and London. To find out more check out the How we work section of our web site or call us on 0845 345 6282.
