It has been well documented that there has been a rise in the number of people who are making financial transactions without advice. There isn’t much you can’t do on an execution-only basis now. You can invest in pensions and ISAs, take out life assurance and income protection, buy an annuity and even go into income drawdown or purchase high risk venture capital trust or enterprise investment scheme products.
The results of this are plain to see with Hargreaves Lansdown seemingly announcing record sales and profits every few months, which is then reflected in their share price. Other discount brokers are trying to get their piece of the ever expanding pie by offering lower charges, although they have some way to go before they are able to knock Hargreaves off their perch.
The first question is whether such a huge rise in execution only business is good or bad.It is positive that people are able to make their own decisions and have plenty of options about where they do this and we are now seeing more price competition which should hopefully mean they pay less. However, the risk is that they get it wrong and if that happens they will have nobody they can blame but themselves.
The Retail Distribution Review, launched at the beginning of 2013, changed the way that financial advisers (as opposed to execution only firms) work. There have been many positive aspects to this including advisers having to be better qualified and increased transparency over how they charge and what clients get in return. However, it has also meant that many people are now unable to access independent financial advice or it simply isn’t cost effective for them to do so.
The next question is how many people who can’t afford advice actually need it.
For many people financial planning should consist of paying off debts, building cash savings, paying off their mortgage, joining their company pension scheme, checking what protection benefits are offered by their employer and if they have spare money they could look at investing in a stocks and shares ISA in a diversified equity, multi asset or tracker fund.
Most people don’t need a SIPP with hundreds of fund choices, they’re better off in their employer’s scheme, and most people don’t need to buy an ISA investing in AIM shares or in Japanese equities.
If people need one off pieces of advice, such as taking pension benefits or protecting their income or family, or if they have larger investment portfolios or income and need to achieve suitable diversification and tax efficiency they should ideally be prepared to for pay for advice.
Some execution-only firms try to convince people that they don’t need advice, perhaps just a little but of guidance or research to point them in the right direction. I wonder how many people have taken out single life annuities when there is a dependent spouse who might need income in the future, or not put life assurance policies into trust so that benefits can be paid quicker and aren’t liable to inheritance tax, or have transferred a pension to a ‘low cost’ SIPP and lost valuable benefits or guarantees as a result, perhaps without even knowing it, or are taking too much or too little risk with their investments, or don’t have their finances structured tax efficiently.
Undoubtedly many people are making good use of execution-only services and their finances are benefiting as a result. However, many others will have made the wrong decisions and might not even be aware of it. If they do get anything wrong the execution-only firm won’t take any responsibility, even if they have provided guidance or research, and the end customer will be very much on their own.