The Work and Pensions Committee is conducting yet another investigation into pensions.
Its questions are wide-ranging but I find its final question to be the most interesting, ‘Do pension customers get value for money from financial advisers?’
How do you answer a question like that?
It is a little like asking where is the best place to obtain value for money for a steak meal – it could be in a pub chain steak night or a five-star restaurant.
The answer you give will depend on your personal perspective. If you don’t have a lot of money and you only eat out on special occasions, a steak night in a pub chain may be seen as a luxury. On the other hand, if you can afford to regularly eat in five-star restaurants and enjoy the finer things they offer, then that will probably be your answer. There will also be many answers in between.
The Committee’s final question makes two assumptions; firstly, that all pension customers are the same; and, secondly, there is only one adviser service level that all can be compared on.
Both of these are untrue. Customer needs vary and there can be many different advice service levels with some firms offering more than one.
The customer may be mass affluent and require advice on how much to save into their pension and what he or she should invest in. This is a lot easier than the advice to the same customer when retired on how much they can safely withdraw from their pension and what investments to hold for that purpose.
A retired customer who is less affluent and has to combine their housing and pension wealth is going to be even more difficult to give advice to. Advising a customer who has a need to evaluate the impact of solutions on their means-tested benefits is also going to be that more complicated.
Does this mean that the less wealth an individual has, the more they should be charged for the holistic advice they need?
On this basis, the person who needs the most complicated advice is the one who would see steak night in a pub chain as offering the best value yet they probably need the services equivalent to those on offer in a five-star restaurant.
So how do you measure value for money in the advisory world?
Most clients prefer to pay advisory fees out of the product, or from commission paid by the product provider. Therefore, the customer pays by either reducing the return he/she receives on their investments or by paying more for the product.
If the only way to remunerate an adviser was to pay a separate fee many more might challenge the invoices they receive. If the invoice is for more than expected, the action of writing a cheque or transferring money introduces an element of checking what you are paying for. This is particularly true if the fee is more than was expected.
This is similar to checking a restaurant bill. If it comes to what your expectations were, it is often paid without challenge. However, if it is a lot more than expectations, the bill is checked to ensure a round of drinks from another table has not found its way onto your bill. Of course, this doesn’t mean in either situation that value for money has not been delivered. Which brings us back to the expectations of the customer around what they are paying for; if they are met or exceeded, the customer will believe they have received value for money.
There has been, of course, a recent Which? report on adviser fees. It found advisers were quoting a wide range of fees for what looked like similar services. But as Which? point out the cheapest may not provide the quality a more expensive adviser may deliver in terms of achieving desired objectives.
The perennial problem is of course that it’s difficult for the customer to compare. They may have got a better outcome at a lower price with another adviser. But how would they know?
Also how much of that better outcome was down to the skill and knowledge of the adviser and how much was down to luck? Over a longer timescale would the results be much different? Advisers need to constantly remind their customers of the value for money they are delivering.
I await with interest the responses the Committee receive to the question they have asked. Part of me does, however, wonder whether there is an actual answer to it.
Bob Champion is chairman of the Later Life Academy