I recently saw a quote from a financial adviser effectively saying it was the “meerkat’s fault” that people did not want to engage with financial advice. If, after a short period online, consumers can obtain comparative quotations and arrange their car insurance, they want to know why can’t do the same with other financial products?
Let’s not forget however that a minimum level of car insurance is compulsory which effectively forces car drivers to purchase the insurance they need. The choices faced by the consumer usually come down to the type of cover required and the amount of excess they are willing to pay. Comparison websites do not include all insurers and better quotations may therefore be available elsewhere, but for a large proportion of car owners, the ‘meerkats’ – that is, compare the market (or, as Russian meerkat Aleksandr says, who is featured in the advert, “compare the meerkat!”) and their competitors offer all they feel they need.
Financial advice however is only compulsory where a transfer of a defined benefit or certain other guaranteed pensions is proposed. This is probably one of the most complicated and specialist areas of financial advice.
The closest thing to car insurance we have is life assurance. The main issues to be resolved are: How to choose the right product for the life assurance need – is a mortgage protection policy required? Should income protection be a greater priority than a lump sum? What is the level of cover required? Finally, are there any health or occupation issues that may mean an insurer who is not competitive for normal healthy people may be advantageous for that particular client?
These issues all need a basic understanding of the client. This is obtained through a fact find. The meerkats, while offering life assurance comparisons do not make any product recommendations.
There is, of course, nothing to stop a consumer from buying financial products direct from a provider without seeking advice. The provider is under an obligation to ensure what is being purchased is suitable but these requirements fall far short of what is required when giving advice.
Auto-enrolment into a workplace pension is even easier than going to the meerkats. Here the employee is included in the scheme unless they opt out. This process, while desirable in using inertia to get many people to save for retirement, will also mean fewer people will approach advisers for pension-saving advice. They know they should save for retirement but don’t have to spend any time to do it.
But what happens when retirement approaches? Before the pension freedom reforms, more than 90% of retirees used their pension savings to buy an annuity. For some this was the final action of any relationship they had with their adviser. For those who did not have an adviser, or chose not to use one, they either used the default option or went to an annuity bureau.
The FCA thematic review of the non-advised annuity market published in 2014 reflects badly on this situation. A lack of provision for spouses; very few taking out increasing annuities to protect against inflation and few underwritten annuities being entered into.
Pension freedoms makes the situation more complicated. Now only 10% of pension savers are buying an annuity when they retire. The alternative – pensions drawdown – is more complicated in that investment and withdrawal advice is required. That is always assuming that lifetime income is required in the conventional sense.
Patterns of moving into retirement are rapidly changing. The amount of income required to meet the individual’s spending needs may require the use of housing wealth to supplement the income that may be generated by pension savings. How will this be achieved? This will be a common problem amongst those who have, during their working lives, placed a greater emphasis on living in a nice home than building large pension savings. There is also likely to be a majority that do not have a good workplace pension scheme.
On the other hand an individual with large pension savings may wish to run down their other assets and pass on a large amount of their pension for inheritance tax-planning purposes. I cannot see the meerkats being able to offer suitable solutions to those in this position after just a short period online.
So where does this leave us? Consumers want instant responses showing them what are good purchases yet financial retirement income-planning is not ‘simples’. In fact, it is far from it, but many consumers will still object to the time and cost of a full advice process that takes them from phasing down work, through retirement to the grave.
One solution could be a retirement financial coach that helps devise the strategy and the plan. Then the consumer enacts the plan, going back to the coach for reviews every few years or when a major event occurs. The plan will cover spending, budgeting and where to draw down from. With the backing of a financial coach, the consumer may find the products they need themselves or they may use meerkat-type services to source good-value products.
Don’t get me wrong I am a strong advocate of financial advice. However, it will be many years before we can get all those who need it to use it. In the meantime we need some halfway houses that can help people approaching, or are in, retirement to avoid suffering from the pitfalls that are just waiting to destroy their retirement. Maybe we need to learn how we live alongside the meerkats rather than blame them for consumer attitudes.
Bob Champion is chairman of the Later Life Academy