The recent IoD Paper entitled ‘Roadmap for Retirement Reform 2012’ painted a stark picture where as a society we have moved from a society of savers to a society of debtors. This was fuelled by the explosion of debt, starting with hire purchase and credit cards through to perceived wealth through the explosion of house prices.
For many they both saw the writing on the wall and did nothing or they assumed it would continue for ever. Some did see the problems and did not partake. The problem is that the party is over. Even a small increase in interest rates will tip many over the edge. Those now waking up to the hangover left over by the party are desperately trying to clear up the mess, paying down debt and cutting back on expenses. The problem is that in doing this we are sacrificing saving for our future.
We also have this unrealistic expectation that we can all retire at 65 and live for the next 20 plus years paid for by thin air. Retirement at 65 was designed when life expectancy post 65 was short. To live for 20 plus years past 65 means a whole new challenge for us. We can complain and moan but the reality is that the party is over and we need to look to the future.
I will not pretend to be an expert on RDR but clearly the intention was to bring transparency to the market and help those at the lower end of the scale. The problem is that there is so much miss information that actually RDR has the potential to be another mess. I have always felt that RDR will split into three camps:
- Lower value – clients with small pots of money will be dragged to the banks. The problem is that more and more banks are actually pulling away from this. So where do these people go to get advice
- Mid value – the average value of clients of the largest direct operation is £40,000 each. Financial planners have indicated that anything below £100,000 cannot work for them. Clearly these people need to go somewhere and the direct market should soak them up
- Higher value – these clients are likely to be already serviced by financial planners and will continue to be serviced by them
The problem is that the public is not being education, the FSA have not finalised important aspects of the change and financial planners are struggling to determine what they are going to do. I have stories of two extreme camps – one where a financial planner is ready, they have less than 100 clients, average investments of around £1 million and a fees of between 0.75% and 1%. The business model works well.
On the other extreme I have seen a financial planner with 4,000 clients who thinks he only has close contact with 2,000 clients. The other 2,000 clients have around £70,000 and he has almost no contact with them. Now I would say of the 2,000 he has “contact” with in reality only 200 are high value clients. So what does he do? He doesn’t want to lose 3,800 clients and all the revenue that comes with it?
And this is the mess that we are in. A lot of platform solution providers are providing financial planners with the tools to service these clients but actually they don’t know how to do this.
The big problem I believe and this is where the government needs to have a ten year plus roadmap is that we need to re-educate people about financial planning. The direct operations do not educate people – they are marketing machines churning out products and solutions. The clients are not in control of their savings. When the markets fall clients rush to cash and the amount of cash clients hold is scary, this is because they have no plans and don’t know when to get back into the market.
RDR is a mess because fundamentally it is leaving a whole slice of people without any means of advice. It means that they need to plan for their future and yet they have no idea how to do it. I believe strongly if a company could turn the whole marketing machine around and introduce the whole concept of financial planning i.e. goal setting, risk etc then over the next few years they could be a force to face.
Going back to the financial planner with 4,000 clients personally I would segment the client base and with slick systems introduce an element of non-advised service to the 3,800 clients with low charges but with a service around education, providing tools to set goals, consider risk and then look at solutions. In time like Australia these clients may have more money and want advice and then become key clients.
The IoD paper just scratches the surface. We have a nation where we are indebted and we are not savers, RDR is forcing people down into the arms of direct operations and these operations are doing nothing to truly educate these people. They work on the assumption that they know what they are doing, this is not the case – they have no choice.
The roadmap is key, the government seem to have no interest in financial education and this is because they have a short term view of the future. The reality is that we have a financial illiterate nation, a nation of debtors and a nation of people with unrealistic expectations of retirement. The future of financial planning in the UK looks very bleak, but I do believe there are small signs of light and it is those small signs that we need to hold onto.