LAUNCHING a service in the financial world is the easy part. Ensuring that it works in the manner intended is much more difficult.
That is why I can give only a qualified welcome to the introduction in the new year of the much-vaunted retail distribution review (RDR).
Few in the world of retail financial services have not given this an enthusiastic welcome. I, too, welcome it. Most IFAs in my experience seek to give good and honest advice and provide investors with a valued service. However, it is surely right that the selling of financial products should not be driven by the commission offered by investment and insurance companies to the financial adviser.
In the new RDR regime, independent financial advisers will be paid by means of a fee charged for advice, and not by commission. One of the long overdue benefits of such a change, for example, is that IFAs will no longer have a bias towards recommending unit trusts and open-ended investment companies (which pay commission) over investment trusts (where no commission is paid).
This has been a particularly perverse feature of the commission system and should work towards a greater understanding and popularity of investment trusts. They have greater investment freedom, they have in the main a superior investment performance, the level and degree of information on investment management is notably higher and fees and charges are generally lower.
Yet encouraging investors to pay a fee for advice may prove a harder sell than the industry is allowing for. For well-heeled investors with an accumulated nest egg of savings, an advice fee of a few hundred pounds may not seem unreasonable. But there are millions of savers with far more modest sums who will baulk at such a payment. Good advice here, particularly for those starting out, is all the more imperative. But an advice fee risks exposing IFAs to the same reticence and recoil that many of us have about walking into a lawyer’s office: an expensive crossing of a Rubicon and best avoided unless you know exactly what you are doing.
Thus, the end result of RDR could be exactly contrary to that intended: financial advice will not be sought and the risk of poorly-informed investment all the more magnified.
Even when modest investors do decide to take the plunge and agree to pay for financial advice, how can we judge its provenance and whether it is really appropriate for our situation? It is here we come to a core question about successful savings and investment: know thyself.
No assessment of our financial situation can begin unless we have some grasp of our longer-term aims and objectives, the amount we can safely commit to investment and, above all, our attitude towards risk. Such questions may seem straightforward but, in truth, they are not. I know my attitude towards risk can now change several times within a year – along with the amount available for investment: this can swing from feast to famine in very short order.
As I wrote here two weeks ago, our attitude to risk can be volatile: what we might consider a year or even a few weeks ago beyond our risk tolerance can quickly come to seem comfortable. This question will be especially acute in the period ahead as we enter what is called “the great rotation”: a shift in our risk tolerance away from government bonds towards equities.
But “know thyself” is the question we must all ponder before we sit down in front of a financial adviser. We need to have a realistic framework for our investment goals, allowance for emergencies, a second “back-up” of easily realisable investment for the unexpected, and finally, our preferences for longer-term investment in more risky assets – and here the longer term should stretch to five years and beyond.
Fortunately, in that search to “know thyself” there is a wide range of free advice available. Whether it is in newspapers, or specialist publications or websites, savers and investors can find a wealth of information and advice. This at the least should better equip us with an understanding of what an IFA is able to offer and the questions we need to ask.
Readers will already have their own preferences for specialist financial advice websites, from basic information at MoneySupermarket.com to Money Which? For those seeking more detailed advice on unit and investment trusts available, the TrustNet website is hard to beat, and has topical articles on investment and fund management.
Fund management companies also offer useful research and information. A popular website for private investors which I use is Alliance Trust and Savings. Other good websites include the Association of Investment Companies, Citywire, Morningstar and Yahoo.
For personal finance expertise in daily newspapers, there are few to beat our own Jeff Salway in The Scotsman whose advice ranges over pensions, mortgages, investment funds and ISAs.
Private investors are not without tools to guide and inform choices – and to address that all-important question before we knock on the door of the RDR independent adviser: know thyself.