In his recent column, Nic Cicutti published an email that he had received from a Money Marketing reader seeking advice about his retirement plans. The reader told the story of his meeting with two advisers and the advice fees they wished to charge.
The fees, expressed as 3 per cent of the accumulated defined contribution pension pot, amounted to £10,500. The reader called the figure “eye-watering” and said the advisers were “incredibly blasé about their charges”.
What struck me was his comment that advisers “will have to do much more to explain and evidence why paying such huge sums of money is a sensible investment”. I agree. Asking someone to part with their money absolutely requires us to provide a compelling description of what we are going to do to add value to their financial decisions. We refer to this as our ‘client proposition’, which is a short-hand way of saying: ‘This is what we do for you.’
The reader spent an hour with each adviser and no doubt a big chunk was the process of finding out about the client’s financial situation. Hopefully it majored on determining his goals and objectives as well.
What do you hear when someone says ‘I need advice about my retirement plans’? I think it is fine to hear ‘I want to know if I can afford to retire and never run out of money.’
They understand there can never be a guarantee about future investment returns, but do they realise there are multiple ways to use their accumulated pension benefits (alongside any other financial resources they may have) and each will have different long-term financial consequences? Retirement planning is complex; it needs a lot of work to provide suitable solutions.
This is where the competent adviser adds value. It isn’t about having a closed mind and automatically assuming that the answer is to start to take defined benefits, with any early retirement penalty applied, although on analysis that might be something that was recommended.
There are many nuances involved in this type of advice. The right solution for the reader may be entirely wrong for someone else with an apparently similar position. Suitability is about the individual, not swathes of people.
Perhaps he should take one or both of his defined benefits; maybe he should take tax-free cash from his DC pot. Maybe he needs to use some of his DC pot to buy an annuity. What impact will state pension benefits have on his future income? How should his pension pot be invested if keeping some of it invested is part of the suitable solution?
We don’t know enough about the reader to understand the complexity of his situation. We don’t know anything about his expenditure, his family or his plans for the future.
It is disappointing, but understandable, that neither adviser wanted to get involved in his DB schemes, but it’s difficult to see how advice about the pension pot can be given in isolation from his other pension benefits. I wonder if either adviser used an engagement letter to describe what they were going to deliver.
Many respondents to Nic’s article agreed that £10,500 was a very high charge, but more disappointing was that neither adviser seemed able to articulate what the reader would get from buying their services.
I agree with Nic that more work needs to be done on this.
Nick Bamford is executive director at Informed Choice