Is it just me, or does it feel like financial advisers are currently having to justify their worth?
An inquiry by the work and pensions committee into pension charges, investment strategies and performance has just closed its call for submissions. High on the list for the inquiry’s attention was a request for views around the cost and benefit of advice. At its most simple, the government wants to understand whether customers get value from financial advisers.
I broadly welcome initiatives that demand transparency from our profession. As well as being important to our clients, it fosters other values, such as diversity, equality and choice, that I consider fundamental to best practice in my business.
But I am concerned by the limited understanding of what constitutes value in financial advice. If the value of advice is only being measured in terms of pounds and pence, cost and performance, this misrepresents the purpose and misses the point of what good financial advice is really about.
When advisers truly work hand in glove with clients, they establish a bespoke, personal relationship designed around what is of value to the client. Although specific monetary outcomes are important to most, the value clients get from a quality adviser relationship runs much deeper than simple financial returns.
Clients are drawn to advisers for many reasons. They may feel overwhelmed by too much information, they are too busy with daily life to seek options or they simply do not feel confident making a significant financial decision by themselves. In other words, they need an expert, steadying hand. Most crucially, they need someone who can give them confidence and know how to make good decisions as well as some sage advice, not just growth predictions.
Value in this context might seem esoteric; but that is the point. Good advice is personal: it is about giving people the ability to get on with their lives; or freedom from financial worry; or the opportunity to grow their hopes and dreams from having a better monetary future.
We cannot predict the future or promise specific percentage returns. But what we do extremely well is use the wealth of our expertise, apply what we know about the markets, communicate what we believe could be happening in those markets, and respond accordingly over time.
I wonder how the government will determine what constitutes value for money with respect to management fees. Our profession can do a much better job of simplifying layers of fees (some fee structures are so opaque, I struggle to make sense of them).
We should explain fees clearly and in some cases reduce them. I still see far too many instances of overall fees (not just advice) in excess of 2% per year, which I find hard to justify. To this end, I believe we, as a profession, have a big responsibility to up our game.
We do have an issue with quality of advice, especially from advisers whom I would describe as being ‘transactional’ in nature. In these transactions, I would say the quality of ‘advice’ is inconsistent.
A transactional approach goes hand in hand with a product-focused and target-centred way of working with clients, where the desire to sell overtakes the desire to explain and work out what is best. This kind of incentivised pushy sales culture often results in clients questioning value.
The value of advice is beyond what you can measure in monetary terms and I believe my clients would agree with that. It is easy to throw stones and destroy a fledgling profession.
But it is much more difficult to create a regulatory framework that provides a good balance between consumer protection and innovative enterprise. I hope the government steps back and takes a rounded view of what constitutes value in our profession.
Anna Sofat is managing director of Addidi Wealth