Its death knell has been rung in error many times before – but are we starting to see the beginning of the end of mass market financial advice?
Ok, you’re going to point out that mass market advice has already died, killed off by the 2013 Retail Distribution Review. The number of working advisers fell sharply after commission was banned, though has since recovered, while the proportion of the population receiving regulated advice has also declined.
At the same time, the bancassurance model was in full retreat which, while successful in stopping bank customers from getting ripped off by poor value products flogged by branch staff, was also successful in stopping people on ordinary incomes getting advice of any kind.
Last week Vanguard, the giant US fund manager founded by passive investing evangelist John Bogle, launched its own pension drawdown account. Normally a little product launch wouldn’t cause much of a ripple but Vanguard is no ordinary fund group. It manages more than $6 trillion globally, for a start, and has quietly taken over as the investment recommendation of choice.
When I speak to financial advisers for “money makeover” style articles at The Telegraph, invariably they recommend a “cheap global tracker fund”, especially for those new to investing. Nine times out of ten, that fund will be run by Vanguard, usually from its LifeStrategy range where you simply have to pick your proportion of stocks to bonds.
Vanguard’s funds are dirt cheap – to invest £1,000 in LifeStrategy will cost you £2.20 a year – and so is its platform fee, add on another
£1.50. At an “all in” cost of 0.37pc this really is a whole new world, and a direct consequence of the wall of money unlocked since 2015 by the pension freedom reforms.
Compare that to the 0.67pc fee you would pay at Hargreaves Lansdown, the market leader. Remember too that Hargreaves’ fees are uncapped, while Vanguard’s platform fee will not go above £375 a year – highly efficient for the larger pot sizes auto-enrolment is happily creating. Incidentally, Interactive Investor’s platform is even cheaper for larger portfolios but fees are not the focus here, advice is.
We know the Financial Conduct Authority is worried about savers’ cash slowly eroding in bank accounts, Premium Bonds or under thmattress. We also know the FCA is concerned those few who do manage to get advice often don’t really know how much they’re paying for the privilege, and that some are even “shocked” when they see the bill in pounds and pence.
Could a very cheap tracker fund sitting on a very cheap platform be the answer for most people? For straightforward cases, the need for expensive ongoing advice is weak. For many people a check-up every year or two is more preferable and cost efficient – and might actually convince advisers to seriously develop business models that support per hour services.
Of course, the missing piece of the jigsaw for Vanguard and others who offer drawdown is withdrawal rates. FCA rules effectively bar providers from telling customers how much and how quickly to take cash out of their pensions. This is an area Hargreaves’ policy bod Tom McPhail was keen on, before he left to evangelise about electric bikes instead of pensions.
One of his pet ideas was to show customers how taking only the “natural yield” of their portfolio would provide an income, albeit it fluctuating, while preserving capital. In the good times you might take 6 or 7pc, in the leaner years maybe just 3pc. I think that’s a simple enough strategy to follow for even novice investors.
But for now, it’s a step too far for the regulator who would prefer to have a regulated adviser in the middle. After all, shouldering the liability of decisions that could mean the difference between having your pension outlive you, or vice versa, is no small ask.
I hope after reading this you don’t think my aim is to rid the world of financial advisers and replace them with fund managers – the horror! No, regulated advice is more important than ever, but the vast majority are better off with cheap check-ups than full fat hand holding. If Vanguard and co have their way that vision might not be far off.