The Financial Service Authority (FSA) should strive to ensure that quality financial advice is taken up by consumers, so that a comprehensive financial plan is an option for all.

This call has been made this week by the Association of British Insurers (ABI), who added that while consumers do prefer to take advice when buying financial products, there are still barriers in place preventing the majority from doing so.

The ABI advocates online financial advice as an alternative to face to face encounters with financial advisers, which it believes would result in a greater uptake for independent financial advice by those wishing to organise their financial planning.

What financial advice do consumers need?

New data* this week from unbiased.co.uk breaks down the financial planning advice business being done by UK advisers, to show where consumers are most likely to take independent financial advice.

The average UK adviser derives the bulk of his business (32%) from personal retirement planning advice, investment & savings advice (25%) and mortgages advice (16%).

There is also strong demand for financial planning advice on ISAs and unit trusts (9%), personal and stakeholder pensions (7%), and taxation planning (7%).

Smaller but still significant demand for independent financial planning advice covers insurance & protection (5%), investment trusts (3%), equity release (3%) and saving for children (3%).

*Source: ‘Top 10 Advice Needs’ Unbiased.co.uk June 2010

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Consumers who would never dream of cutting their own hair will happily ’have a go’ at sorting their own finances without expert financial advice.

While 38% of us would turn to an expert for ‘cutting or dying hair’, and 60% of us would call an expert to repair our car, only 14% of those between 50 and 70 would turn to an expert for help with pension planning, according to a new survey*.

In other areas of our financial planning, we show an equal tendency towards being ‘advice shy’. Only 32% of people would seek help in arranging their mortgage, only 24% would ask for expert financial planning advice on tax matters, and only 23% would ask for qualified investments advice.

People are more likely to consult a hairdresser, an electrician, a plumber, or hire in a painter and decorator than make a financial plan on the basis of qualified financial planning advice, the research revealed.

Younger people are more open to seeking help with their financial plan than older people. While only the 14% of people in their 50s and 60s (mentioned above) would seek financial advice on their pension planning, this figure rises to 29% for people in their 20s and 30s.

The percentage of people in their 20s who would seek financial advice on buying a mortgage is 52%.

“Seeking independent financial advice on your finances, whether it be mortgages, retirement or savings and investments, is an invaluable step in making sure you are getting the right advice and the best solutions, both for you and your family’s financial requirements,” said Karen Barrett, chief executive of unbiased.co.uk..

“It is understandable that people may naturally shy away from the often daunting task of sorting out their finances, but by using an independent financial adviser, you can entrust an expert to research the whole of the market and make specific recommendations for your individual circumstances.”

*Source: financial advice researcher unbiased.co.uk / Opinium Research survey of 2.065 UK adults

Addressing members of the credit industry, Malcom Hurlston of the Consumer Credit Counselling Service emphasised the need for those seeking first time buyer mortgages to fully inform themselves of the financial burden that comes with first time buyer mortgage deals.

First time buyer mortgages should be sold with a health warning, not tax breaks, and those taking on first time buyer mortgages too soon were those most likely to have difficulty and fall behind with payments, he said. Mr. Hurslton pointed to pre-buying education available to those seeking first time buyer mortgages in the US.

Mortgage advice and the services of an independent financial adviser were particularly crucial to those taking on first time buyer mortgages who were also on low incomes. He pointed to Northern Rock as an example. “Was it not apparent to everybody here that 100/120% mortgages, some partially disguised as unsecured, was dangerous madness?” he said.

First time buyer mortgages should be sold “like driving licences, after study and an exam,” he said.

The Council of Mortgage Lenders issued a response to Mr. Hurlston’s comments by pointing out that most of those with first time buyer mortgages who got into trouble did so because of a change in their circumstances, such as being made redundant.

A recent report from the Association of Independent Mortgage Advisers (AIMI) showed that taking independent mortgage advice results in finding better first time buyer mortgage deals in 9 out of 10 cases, and will save on average almost £1,000 per year in repayments on a first time buyer mortgage, and on most UK mortgage deals.

Banks and building societies in many of the 27 EU countries are now offering consumers special deals on one savings product or investment, provided that they also sign up for additional services or an additional investment at the same time. However, such “tied” deals involving 2 linked products are not always in the best interests of the consumer, according to the EU, and investments advice from an independent investment planner is essential, to evaluate the overall benefit.

In the UK and throughout the EU, the most common such deal relates to bank current accounts, offered only if a salary is lodged into the account each month. However, mortgages and loans are also widely-used as ‘gateway’ products to sign customers up for additional business. In many instances, consumers are required by their investment adviser to sign up for an extra credit card, when seeking a loan.

In the UK, one such example of a tied product is Yorkshire Building Society’s attractive rate of 6% on investments in its Combination Bond, which is available only if you simultaneously invest the same amount in a Legal & General investment bond.

Santander and Saffron Building Society also offer tied deals, but stress that this happens only in conjunction with investments advice to their customers. However, since the investment planner giving the investments advice is an employee of the lender, there is no independent aspect to the investments advice received.

The result may be that the customer sets up an investment in a bond product which they otherwise might have neither sought nor taken, and the value of which can fall as well as rise, the EU concluded.

Another potential disadvantage of tied products is that they form a double link, which limits the customer’s freedom to switch to another lender. The EU estimates that investment advice which leads customers to take on tied products has created a total of 572 million contracts which would be switched, if the customer were not tied and felt they had greater mobility.

The EU report criticised lenders offering tied products for imposing ”choice distortion” on consumers, by limiting their options in the marketplace, and called the condition of having to take an additional product or service a “coercion factor” resulting in an investment decision that otherwise might not have been made.

Independent investment advice by a qualified investment planner capable of a full market overview may help the consumer evaluate the overall benefits and risks associated with such two-part tied deals.

More than half the UK adult population have made pension planning a priority, driven by fears that they will outlive their expected pension income, according to new data released today by Prudential*.

Increasing longevity has led 59% of UK adults to conclude that their current pension plan will be inadequate to sustain them in old age. Today, the life expectancy for a 30-year-old man is 86 years, and for a woman 89, leaving many with the challenge of factoring a 20-year retirement into their pension planning.

Prudential reveals that 55% of British adults are now enhancing their pensions planning with second pensions or other savings and investments designed to boost their pension income.

Over a third (36%) stated they either are or intend supplementing their pension plans with additional cash savings, 17% said they are looking to stocks and shares investments, and 15% are seeking to downsize their homes as part of their pension planning.

In addition to general pensions planning, 19% of adults say they also intend to continue working beyond retirement age.

Over a third (36%) of British adults will still be taking a lump sum upon retirement as part of their pension planning, despite the fact that this will reduce their longer term pension income once they give up work. Of those who will take a lump sum in this way, the average amount to be taken will be 17% of their total pensions savings, Prudential said.

“Increasing longevity means workers are having to accept that pensions will be stretched over a longer period, and will therefore deliver a lower income,” said Richard Harrison, Prudential’s Corporate Pensions Director.

“”This is a scary proposition for people considering how to fund their retirement, but there are plenty of options for boosting savings,” he said.

“We believe everyone should see an independent financial adviser to ensure they are saving enough to fund their life in retirement.”

If you would like to calculate your probable pension income now, use our online pension planner, make a pensions enquiry for our ringback service, or speak to one of our friendly independent pensions advisers on 0800 678 5929

*Survey of 2010 UK adults by Research Plus

The research, carried out for the April 2010 edition of Which?, revealed that the tied advisers recommended inappropriate products, failed to properly explain risks, and generally failed to achieve the basics of good practice, in giving financial advice.

Of the 37 advisers, 21 recommended products which they described as ‘capital guaranteed’, despite the fact that inflation or early withdrawal from the scheme could reduce the real return or incur charges that would reduce the capital. Eight of the advisers incorrectly used the term ‘low risk’ to describe these investments.

Six advisers suggested placing the lump sum investment in an investment bond, but, again, failed to adequately explain the risks involved.

Fourteen of the advisers did not draw the customer’s attention to the Financial Services Compensation Scheme (FSCS), and only one adviser out of 37 suggested splitting the cash into 2 investments, so that each would be protected under £50,000 limit of the FSCS.

What constituted good financial advice

For the purposes of the survey, Which? defined 6 points that constituted good financial advice. Advisers had to:

• Disclose their status as tied adviser offering limited product range
• Carry out a thorough fact-find
• Establish the customer’s attitude to investment risk
• Discuss tax in relation to the product they were recommending
• Fully explain the product, including the risks
• Explain the product’s fees and charges

The institutions visited were four branches each of Alliance & Leicester, Barclays, Bradford & Bingley, HSBC, Lloyds TSB, Nationwide and Natwest, and three branches each of Abbey, Britannia/Co-op Bank, and Halifax/Bank of Scotland.

The researchers posed as over-55 retired savers, Which? said.

The report highlighted the deficiencies of tied advice, where employees of the high street institutions are limited to selling their own products, and has been termed ‘a sad indictment of the sales culture in large institutions.’

Which? added that it “advises people with money to invest to go to an independent financial adviser (IFA) who can search the whole market, find the best deals available and recommend something suitable.”

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Several months before retirement, most pensions savers receive an information pack from their pensions provider informing them of the regulations governing pension income. While they are correctly informed that they may take 25% of their pension savings right away as a tax-free lump sum, and that they have the right to defer purchasing an annuity until they are 75 if they wish, the arrival of this literature gives many the impression that they are required to buy their pensions annuity from their existing pension company.

This is not the case; in fact, pensioners are given the right to compare annuities freely, considering the whole market. We shop around when buying a car that will last us perhaps 10 years; how much more important to shop for your pensions annuity, which will be an ‘all of life’ decision, and largely dictate your quality of life in retirement!

Taking as an example figures for December 2009, a simple search for an annuity from a pension pot of £100,000 flagged up products providing vastly different monthly incomes. Simply by shopping around, annuities were available from Canada Life paying £5,628 per year, down to a Scottish Widows annuity paying £4,632 per year.

With one simple search, it was possible to find an annuity that added £996 per year to your retirement income!

Most important when shopping around for any financial services product is to use an independent financial adviser, whose whole of market approach ensures that all available products are considered, when searching for the right annuity for you.

Members of defined contribution (DC) pension schemes saw their combined savings fall in value from £526bn in December to £509bn in February, new data reveals.

This loss of income could be significantly reduced by regular pension advice and reviews, and a more active investment strategy, according to pensions specialist Aon Consulting.

The report compared three scenarios based on three individuals of different ages, each contributing 10% of a £25,000 salary to a defined contribution company pension scheme.

For each, projections show how their likely retirement income has changed over the two-month period from December 2009 to February 2010.

A pensions saver now aged 30 saw his projected annual retirement income fall from £20,574 in December to to £20,164 in February.

A pensions saver now aged 60 saw his projected pension fall from £12,125 to £11,216 in the same period.

A pensions saver aged 65 saw his projected annual pension fall from £8,962 to £8,233 in the same period.

In the case of the 60 year old, the report based projections on an investment strategy consisting of 50% UK equities and 50% overseas equities.

However, the report claimed that if a financial adviser had looked at that investment, and switched it to 25% cash and 75% gilts, the 60 year old would receive nearly £1,000 per year more.

*Source: Aon Consulting

In particular, the OFT will examine ‘small print’ issues, in order to identify which types of contractual arrangement most often lead to consumers losing out, as a result of not understanding the complexities of their agreement.

The area of online purchasing of contract-based products will be a particular focus within the study, according to the OFT.

Earlier this year, the Association of British Insurers (ABI) already highlighted the issue of insurance companies, eager to issue quick-quote responses to enquiries received online, who failed to ensure that customers understood the conditions of the contract being offered.

The issue highlighted the need for the services of independent financial advisers, who can explain the ‘small print’ issues in insurance policies, particularly as each insurer has their own terms, conditions and exclusions.

In critical illness insurance contracts, for example, consumers are often unaware that the common conditions of back pain and stress are usually not covered. Second, stroke and many other ailments are covered only when they leave permanent symptoms.

Third, heart attacks are covered only when they are of ‘specified severity’ as established by an electrocardiogram test (ECG). This means that a mild heart attack might not qualify for a payout on the critical illness policy.

Fourth, critical illness cover does not pay for injuries or conditions deemed to result from drug or alcohol abuse, criminal acts, or injuries that are self-inflicted.

These were the main areas where consumers sought independent financial advice in 2009, according to latest data from IFA Promotions*.

How are consumers using independent financial advice?

•  Pensions and Retirement Planning 

In December 2009, advice on pensions and ‘Personal Retirement Planning’ accounted for 37% of all enquiries received, compared with 27% at the beginning of 2009. 

• Investments and Savings 

Enquiries on savings and investments accounted for 28% of all requests in December. 

• Mortgages

Mortgage advice accounted for 8% of enquiries during the test period, perhaps less than expected due to the relatively subdued mortgages market last year. 

• ISAs 

Advice on Individual Savings Accounts (ISAs) brought in 8% of enquiries for independent advice, as consumers looked to take advantage of tax-free savings and use up the individual ISA allowances of £7,200 for the year (£10,200 for those over 50)

Other advice drivers included tax planning (6%), insurance and personal protection (4%), investment trusts (3%), equity release (3%), and saving for children (3%).

While the latest data notes minor shifts in investor priorities, the advantages of consulting an independent financial adviser never change, according to Karen Barrett, Chief Executive of IFA Promotions.

“An IFA can give you specialist advice on specific product areas and can recommend solutions from a cross the whole of the market, rather than just a selection of providers,” she said. 

*Report based on analysis of 350,000 consumer requests for independent financial advice through IFA Promotions/Unbiased.co.uk  in 2009