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How financial advice has changed since the bad old days
Few innovations have changed investing for “normal people” as much as the passive fund (also known as “index” or “tracker” funds). The group most responsible for driving this innovation forward is arguably asset manager Vanguard, which popularised indexing fund under its founder, the late Jack Bogle.
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Active fund managers try to beat the stockmarket. They charge a lot for doing so. Unfortunately they don’t usually manage to beat the market – and then you have to pay the fees on top. Passive funds just copy the market. They don’t do anything clever, so they’re cheap. Add it all up, and chances are, the average investor will be better off in a passive fund than in an active one.
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You’ll note that the key insights here are nothing to do with investment strategies. Instead, it’s all about simplicity and cost. You get the average return, but you pay below average fees. In avoiding the temptation to do anything too clever, and by controlling the one thing you can control – your cost of investing – you dramatically raise your odds of achieving a satisfactory outcome.
Now Vanguard is applying similar logic to financial advice. But before we talk about that, we need a bit of context. The financial advice market in the UK has changed greatly in the last decade or so.
In the old days (before the end of 2012), independent financial advisers (IFAs) were able to fund their business via commission, so you wouldn’t pay an upfront fee for financial advice. Instead, the IFA would recommend products, such as funds, to you. You would buy those products because your IFA had recommended them to you. The IFA would then get paid commission from the fund manager.
If you’re gawping at this concept because you’re young and you don’t remember the olden days and you can’t believe that anything this blatant could happen, then please let me assure you that it did.
The entire industry (with some admirable exceptions) would swear blind that this did not represent a conflict of interest, even though the funds that paid the most commission were – strangely – the ones that got recommended (this is one reason why investment trusts – which were never able to pay commission – struggled to find a place in the average private investor’s portfolio.)
It’s something that we endlessly complained about here at MoneyWeek. And thankfully, the regulator, under the Retail Distribution Review (RDR), eventually put a stop to commission (in most cases).
What does Vanguard’s new financial advice service cost?
Today, advisers have to present their charges clearly, and they have to be better qualified. However, fees can still be pretty tricky to understand (try comparing charges between IFAs and you’ll soon see).
Also, financial advice is not cheap. That was always the case, but now that it’s clear, and now that advisers have more regulations to follow and require more qualifications, anyone who has less than at least £100,000 in investments and savings will struggle to find an adviser who’ll take them on.
The rise of robo-advisers tries to plug this gap in the market by having sets of fund portfolios that you can invest in based on your risk appetite.
But now Vanguard has launched a service which is something of a logical next step. The Vanguard Personal Financial Planning service is open to investors with at least £50,000. Investors will get personalised advice on their retirement savings for a fee of 0.79% a year. That includes fund fees, trading costs, and platform charges. And there are no entry or exit fees.
This is extremely good value. Typically, as the situation stands, you’d be paying an adviser, and then you’d be paying fees for your funds on top of that. In all, you could quite easily be paying twice the Vanguard fee or even more.
That makes a big difference. As Vanguard’s own figures suggest, if you had a £250,000 portfolio growing at 5% a year, then over 30 years you’d make an extra £275,571 by paying 0.79% rather than 2% annual fees.
To be clear, Vanguard’s service is not the same as that of an IFA. For one thing, it can only offer Vanguard products (an IFA will look at suitable products from across the market). For another, it’s only about retirement savings. So you’re not going to get advice on life insurance or income protection or those aspects of planning that you’d expect from an IFA.
However, given that lots of advisers these days will put you into passive funds (because they’re the obvious choice and low risk from a regulatory point of view), the “restricted advice” aspect of Vanguard’s offering is not really a disadvantage.
As for other aspects of planning – for the level of wealth Vanguard is aiming at here, your needs are unlikely to be especially complicated. An afternoon sitting down with Google and a few comparison sites could probably sort most of those things out for you pretty rapidly.
So what do you get from Vanguard? It’s a tiered service. At the £50,000 starter level, you put your details into the Vanguard website and it creates a financial plan based on your goals and your risk appetite.
Vanguard will pick the funds for you. These will be entirely from its own range, but the available tracker funds cover all the major equity and bond markets you’d need (including index-linked bonds and cash equivalents).
Those with £100,000 or more (generally the minimum that you’ll need to get a more traditional IFA) will be able to talk to a team of financial planners. Those with upwards of £750,000 will have a dedicated financial planner.
The real breakthrough here is the transparency
This looks like great news to me. Vanguard already provides products that will work fine for most people’s core holdings. So if you aren’t someone who wants to spend a lot of time worrying about where to invest (and not everyone does), and you do need the reassurance of an adviser, then this is a good solution.
Yes, you can argue that if your finances on the investment side are straightforward enough to go for the Vanguard option, then you could probably just run them yourself. But not everyone wants to do that.
And yes, the more money you have, the more likely it is that you will need more complicated planning advice (though you could bolt this on), or that you might want to put money into assets where you will genuinely benefit from quality advice.
(An aside: to be clear, I’m not talking about elaborate tax planning here. That was never a great idea and these days, anything that smacks of a loophole or a grey area can be retrospectively shut down in any case, so it’s a waste of time and will turn out to create you far more headaches and stress than it takes away. I’m more talking about things like investing directly in businesses that you’re interested in, or agriculture, or something else that involves more engagement than simply being a shareholder in a public company.)
But even if you’re a more engaged investor, paperwork is no fun. As Holly Mackay of Boring Money puts it: “at 0.79%, to have a... service which maximises your tax allowances, does the juggling between Isas and pensions for you, keeps an eye on future nasties such as the Lifetime Allowance, and provides regular access to people on the phone if you have more than £100k invested – that’s interesting.”
And it might well open people’s eyes as to just how much financial advice is costing them. One thing that Vanguard has always done well is transparency – one figure that covers everything is a real rarity in financial services and it might be the best thing about this launch. You can see what Vanguard offers as a benchmark. You can then look at what your IFA is doing on top of that – if anything – to justify their extra costs.
In the end, the reality is that a lot of people find investing and saving and money in general intimidating. This level of gentle, transparent hand-holding is something the industry badly needs (and if you know someone like that, why not buy them a subscription to MoneyWeek – our goal is to demystify this stuff and explain finance in plain English.)
