Are you ready for January 2013?

If you are a customer of Lloyds Bank, are you ready for some good news? The bank will no longer offer face-to-face financial advice. So when you go to the bank to pay in a cheque, you will not be asked if you have considered this, that or the other savings product. You will no longer be invited to discuss your financial plans with the earnest looking young man in the meeting room.  

You will, though, only have this blessed relief if you have less than £100,000 in savings – savings known to Lloyds, that is. If you make the mistake of revealing that you have a six figure sum stashed away somewhere else, you can look forward to the full sales pitch. Barclays, HSBC and Royal Bank of Scotland are following near identical strategies, all targeting the wealthiest customers and abandoning the rest.

So why have these pillars of the high street chosen to favour the filthy-rich and deny the more moderately affluent the benefit of their advice? According to Lloyds it is because “demand for a fee-based financial planning advice service decreases when they have lower amounts to invest”. This hardly sounds true. The richer people are, the savvier they normally are about their money. It is those that have just a few thousand that could probably benefit most from some decent financial advice.

Delivering advice in a post-RDR world

Unfortunately for those people, they are being cast to the wind, and the real reason is given in a research paper from Deloitte called Bridging the Advice Gap – Delivering Investment Products in a post RDR World. Deloitte has revealed the startling fact that 87% of customers who purchased a savings or investment product via a bank adviser in the past three years assumed that the process was ‘free’.

Of course it was not free.

The bank would recommend savings products and then take a nice rake-off from the provider of that product. As I have described in two recent issues of Penny Sleuth, this practice is to be outlawed from the beginning of next year. Financial advisers must make their charges explicit up front so that the customer knows exactly how much he or she is actually paying. Based on a survey of over 2,000 adults, most of those customers are “likely to react negatively”. Hardly shocking.

“Customers may be surprised by the high cost of advice” (I’ll say!)… “and they will question its value”. I have had some great feedback from my two previous articles on this subject, but this Deloitte report begs the question – what happens next?

5.5 million customers left to fend for themselves

If you have £30,000 of savings and don’t know what to do with it, to whom will you turn? Maybe some will go to IFAs. The report diplomatically states that bank advisers face “reputational issues” and are seen to be too “sales-oriented”. A good IFA should at least have his reputation intact and could try to pick up some of the business dropped by the banks.

But IFAs, too, are heading up-market to target the rich which, according to Deloitte, leaves 5.5 million disenfranchised customers who “will either choose to cease using financial advice or lack access to them”.

Money does not manage itself. Most people know that sticking it under the mattress is the not the best long-term investment strategy, so they will have to make a decision somehow. It seems inevitable that the first port of call will be the internet. I see two difficulties here.

Firstly with product providers – the big unit trust groups for example who have traditionally relied upon financial advisers to steer business their way, effectively acting as their marketing arm. Now these product providers will be looking to market to the customer directly. But will this simply be a matter of flogging products or will they make any attempt to find out what the customer really needs?

One piece of advice does not fit all

An alternative web-based offering is likely to be a do-it-yourself financial planning kit. You enter your financial situation and aspirations and the computer automatically tells you what is best for you – the machine effectively replacing the earnest young man. As ‘Edward from Portugal’ points out: “according to the best advice rules everyone gets the same recommendation according to the chosen risk rating”.

This prescriptive approach implies that there is one investment strategy that is indubitably correct for any set of circumstances. This is dangerous. Such models are usually based on historical investment returns that are by no means certain to be repeated in the future. And most financial crises arise as a result of people plunging en masse into things that are said at the time to be good for them but subsequently prove the opposite.

I don’t like the sound of it. But one thing is clear. Savers can no longer rely upon good financial returns. They need to wise up and have a basic grasp of different investment products.

• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by Fleet Street Publications Ltd.

  • Tim

    your not liking it seems to stem from the idea that it will recommend one solution but I suspect it could offer a number of simple solutions such as any or a combination of these five generalist unit trusts or investment trusts would be a sensible choice given what you have input as investable money and risk tolerance

    That sounds like a pretty good cheap outcome to me and of cours you always then have the option to pay for a follow up meeting if you feel that your circumstances are more complicated

  • Andre

    I agree that it may end up with websites like compare the meerkat for car insurance, where people will go for advice.

    How this website will not work (tell the truth), look at what is going on with car insurance. (We’ve just renewed our car insurance so I’m speaking from experience.) The flaw in a ‘one stop’ website is that they will structure (hide charges) in a way just so their product is rated best for you. It is only once you have already spent a lot of time going down their route/product that you realise the actual cost is more than what was “quoted” on the website.

    They will have excuses for the “additional” (hidden) charges and they will all be doing it to get to the top of the list otherwise they will go out of business. Worst is that you will not have an option, you will have to accept the “additional” / “on top” services and pay for it.

    Investment is not rocket science, look even I can do it . . . and I don’t charge myself if I loose money !?

  • Warren B.

    What I can categorically confirm for you is that people going out and buying penny shares is most certainly not a desirable consequence of RDR.

    Do you do horse racing tips too ?

  • Beta adjusted

    People should stop investing in these funds and start investing in individual companies. Unfortunately, for most people, they will lack the time and skills to do the analysis for themselves, so would wind up having to put their trust in somebody/something which leaves them again open to exploitation. There is no short-cut. If you want to buy something, you need to become knowledgeable about it, if not an expert. That principle should be multiplied by a factor of 100 if we are talking about your hard-earned savings.

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