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Advice gap
10 Aug

The Advice Gap Is Coming To The UK

Advice gap

A lot is happening in the world of pensions since the government has introduced its sweeping reforms in April. The effects have been multiple and of varying significance.

Amidst those that are currently being discussed by industry experts, one is particularly worrying: the advice gap. The advice gap, in the same fashion as the wealth gap, has its roots in income inequality and denies certain opportunities to people in the lower income/pension savings bracket. Simply put, the advice gap is a consequence of some IFA’s reluctance to advise their clients on the new pension freedoms and the ability depositors now have to access their pension pots. From their perspective indeed, giving advice on pension pot utilisation does not look too enticing. Such advice requires inside-out knowledge of the client’s income, assets, liability, employment, and so on. In order to carry out this tedious task, serious inquiries have to be undertaken (provided we are talking about a diligent IFA) and more often than not, these prove costly.

The consequence is that IFA’s end up charging not hundreds but thousands of pounds sterling for ‘simple’ advice on pension pots withdrawals. Bewildered clients (often incredulous) have no other option but to pass on the offer, thus forfeiting the independent advice depositors are meant to be getting before getting their hands on their old-age funds. Those who are prepared to pay, but wish to ignore the recommendation (a category of consumer known as “insistent clients”) carry a separate health warning. Having blown their pot, could they receive a cold call in the distant future about the mis-selling of pensions advice and bring a claim against their IFA? For this reason, advisers say they would rather say “no” and lose the business.

How could this issue be addressed? Two alternatives take shape here. The first would be to embrace the American system and rely on so-called “robo-advice” where savers enter detailed information about their circumstances in order for powerful algorithms to narrow down their investment options. But even if this method were allowed for UK pensions savers, the legacies of multiple pension schemes could prove too complex. The second alternative would be to dispense more guidance as opposed to advice. This would be the equivalent of a well-trained pharmacist making recommendations but which could not possibly be fully relied upon unless the said pharmacist were in possession of your full medical records.

What is absolutely certain is that financial education has to come into the fold so that savers have a clear idea of what they are meant to do once they get access to their pension pots. Indeed, it could well be that just like the wealth gap, the advice gap could be shrunk thanks to education. Or perhaps this is an opportunity for smaller IFA’s to charge less and fill in the gap left by larger corporations shying away from entering the trade for a smaller price.

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