Financial Advice Supplement 2003: Interview – IFA action must be lent to staff debt

In 2001 a report on financial advice in the workplace was published by the Banham Inquiry. In case you missed it among all the raft of reports published in the past year telling us how we can run pensions and other financial products better, this one said that employers are ideal conduits for providing access to financial advice for the working population. But before you take fright that some regulation is about to come in that you were unaware of, the aim of the Inquiry was simply to spark debate. The Institute of Actuaries, the independent body which set up the Inquiry, saw its role as catalyst to the discussion on how the UK could cope with the potentially disastrous savings gap – we are currently facing a great big hole of about ¬£28 billion. Suddenly my post-Christmas overdraft doesn’t look so bad. Alan Goodman, who is the chairman of the consumer financial support committee for the Institute of Actuaries, acted as expert adviser to Sir John Banham and his committee. Or as he puts it: “I did a lot of the spade work.” A major issue considered by the Inquiry was the crucial lack of access to financial advice that the majority of the population experience. It is all very well for top earners who are targeted by financial advisers with wealth creation programmes, but these exclude about 90% of people. “The fundamental need for the vast majority of people is about debt management. A lot of people have financial advice but it tends to polarise at the top end – where financial advice is important but is less critical. People, frankly, who need it the most, find it extraordinarily difficult to access,” says Goodman. He laments the death of the door-to-door salesman: “We have now lost the Man from the Pru. I think it is still actually very sad that we have created a product regime that means it is unviable for somebody to actually provide the sort of service the Man from the Pru provided in the past. People actually saved as a result of that. And although from a purist point of view the products were not desperately good value for money; by and large it was better to buy a product that might not have been fantastic value-for-money than consuming it on cigarettes or drink or whatever. “We had a climate where people were motivated to save. But the catalyst wasn’t the consumer themselves it was the fact that this person that they trusted came round encouraged them and provided that access. Those days are gone, sadly, and we need to replace them with some other form of access.” It became clear to the Banham Inquiry that the best solution lay with employers, which are in the position to act as a key route to financial advice. Goodman is keen to emphasise throughout our interview that there are models of excellence among a few UK employers, but for the vast majority of employees there is a real paucity of advice. There are fundamental reasons why employers find it difficult to provide access to advice in the workplace. “Their first concern is about liability and accountability. Employers are worried they may be liable for any advice.” It must be frustrating for HR, benefits and pensions managers to watch staff make bad choices, but feel that their hands are tied by strict financial service regulations. The regulator is aware of the problem and Goodman points out that “there has been a missive from them which clarifies what an employer is allowed to do and say. But most employers naturally err on the safe side”. “We have also got to remember that for many of the human resources people, and even more so for the pension scheme administrators, their core responsibility is the employer’s pension scheme. And while they are more than happy to provide information, it is factual information about that scheme.” So the typical member of a defined contribution scheme heading to retirement does not know where to turn to find help when making choices. Not surprisingly, the second fundamental problem for employers hangs on cost. Because the government has a vested interest in doing all it can to close the savings gap, Goodman believes it could look at providing fiscal advantages for employers. “Certainly if an employer is prepared to shell out a bit of money it has got to be an allowable expense. It mustn’t be treated as a benefit-in-kind.” But even the best intentioned employer will be in for a rude shock if it thinks staff will be hammering the door down for advice. “Generally speaking, there is a lack of interest in the subject matter except at critical points in their life, for example, buying a house or retiring.” And as with employers, staff are concerned about costs. But Goodman thinks the nub of the problem of lack of access lies with the providers. They can justify cherry-picking high net worth individuals and senior members of occupational pensions schemes, but for the vast majority of scheme members, the pot of retirement savings is just too small to be a source of revenue. The other problem is that the advisers and consulting actuaries already working with HR and pensions departments are there to advise the employer or the trustees, not the employees. “For many of them personal financial planning to mass employees isn’t something which they specialise in.” He asks: “So if they don’t, who will? Is somebody else going to be allowed to come in? There are all sorts of issues about roles and responsibilities if you have two advisers. These should be non-issues but in the commercial world there are sensitivities.” Now there are a number of financial advisers and insurance companies which do specialise in providing advice in the workplace, but “you also have, on the flip side, a number of mainstream providers which have shied away from it”. However, Goodman sees financial advisers as best placed to come up with solutions to knock down objections, particularly on cost, from employers and employees. “We need to find a way to provide what an employee needs in a way which is cost effective and meets the objective of the employees and the employers.” Fortunately he has a solution to this conundrum. (I must warn you at this point, that Goodman does have a vested interest in this solution. When he is not wearing his Institute of Actuaries hat, he is managing director of independent financial advice firm, “My belief is that the solution is about getting smarter in terms of how [providers] interact with the employees. It is about low cost delivery of information and advice.” Although he believes that face-to-face advice still has its place for some people, we also need to recognise other, more financially viable, methods of getting advice to employees. This can be over the telephone or via the web, after all today’s consumers buy anything from car insurance to holidays in this manner, so Goodman believes that there is no reason this cannot apply to financial advice. “Within my own company we can deal with ten times as many people by engaging them on the telephone than if we have to go through a face-to-face process. “For example, if you are talking about an employer acting as a conduit, I would be talking about the use of a combination of the internet, a company’s own intranet and extranet, and internal communication capabilities.” For example, intranets could run simple interactive tools, which could be backed up with telephone advice. “I want to see, not a replacement of face-to-face advice, but a viable alternative which is person-to-person driven.” Goodman acknowledges that this would take up work time and might have a short-term impact on productivity, but he believes that enlightened employers would be able to spot the longer term, goodwill advantages. A crucial reason why the employer would be an excellent conduit for getting financial advice to employees is that “the employer, by and large, is trusted by employees and confidentiality is seen to be a non-issue.” Of course, advice on an additional voluntary contribution to the employer’s pension scheme is one thing, but if debt management were to be discussed then you get into an extremely sensitive area. “And this is where confidentiality is more important than ever. But if confidentially is assured then it should be part and parcel of that provision of advice.” Although Goodman supports the idea of simplification of financial products, as recommended in the Sandler Report on simplification (another of those many reports published last year), he believes that simplicity on its own will not help solve the savings problem this country faces. “We have got to have simpler products. However, what we mustn’t underestimate is that people, generally speaking, do not have capability to make their own decisions without help.” “I’m very strongly against this idea that if you educate people, provide them with all sorts of tools and information, they will decide what they need and go out and do it. It’s absolutely wrong. People need help. People look for support even if it is only to confirm their own understanding.” All this relies on employers who are prepared to act as a link to the process.