Do All Investors Need Advice?

The Government is offering free guidance to all savers approaching retirement. Are these simplified recommendations enough to ensure investors make the best possible decision?

Emma Wall 21 May, 2015 | 10:00AM
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This week is bringing you simple solutions from the experts about where you should put your money and why.





Emma Wall: Hello and welcome to the Morningstar Investment Conference. I am Emma Wall and I'm joined today by Anna Sofat of Addidi Wealth. Hi, Anna.

Anna Sofat: Hello.

Wall: So, we've just watched you in the panel in the Morningstar Investment Conference, talk about what good advice looks like. I think the big question for investor today, especially those approaching retirement, is what to do with these new pension freedoms. And advice has an important part to play in that. What the government is offering is something called guidance. Do you think this is going to be enough?

Sofat: I think it will be a good starting point and I think this is process that most clients, if they haven’t got an adviser, they should definitely go through because it will give them the options available to them. But what it won't do necessarily is determine what's the best course of action for them.

So most clients what they are looking at is; taking money out, perhaps putting it in the bank because they feel they can control it better, maybe spending some of it. What they are perhaps not considering is what that value of that fund – of that pension might be in future to meet their future needs.

Wall: Is there is a risk that the guidance is oversimplified. Investing is such a personal thing. Everything depends on your health, your goals, your risk appetite, how long you are going to live and those sorts of things cannot be offered, can't be tailored with something as simple as guidance.

Sofat: No, it can't. I think what guidance can do, so is to highlight some of the issues and some of the risks involved. So guidance can actually, say, do you know, for example, the average age a 65 year-old now lives to and what do you think your life expectancy is. I asked a kind of mine recently and you are out by at 10, 15 years.

So I think there are things they can do to make individuals think and question what they might want to be doing, and then to work through things. But I don’t think… it is not going replace advice. It's not meant to.

Wall: Does everybody need advice because I suppose there is an argument that if your pension pot is small enough, actually you would be best served just taking a lump sum or doing draw down?

Sofat: Potentially, I mean I spoke to a prospective client just this week. They had £34,000 in a pension, part time teacher, looking to take that money out. And obviously, part of that is tax free, so it's quite attractive. But she have no ideas of the options available to her, apart from taking it out or buying an annuity, and partly because her pension provider can't provide anything else.

She hadn’t gone to seek guidance. What she had been told is, you must go and get advice before we can give you your money. When she actually understood, that actually she could treat her pension pot as a cash pot and withdraw it at certain points, perhaps when she doesn’t have to pay tax on it or mix the tax free cash with the income to deliver a really tax efficient income each year. She had a different perspective.

But then we came to the issue of cost of advice because, frankly, she – for the amount of what we're going to charge is not going to be cost-efficient for her.

Wall: So who is in charge of providing that information? Because as you've highlighted, the key problem is so many people don’t know the options available to them. They don’t even know they can go to the guidance to get it. So who should be in charge of this education?

Sofat: I think in some ways everybody in the industry, whoever happens to be their first point or any point of contact, I think has a responsibility to point out to them what is it that they need to go and do. Go and find some guidance, go and talk to Pensions Wise because actually it's available to them and is easily accessible.

Go and talk to couple of advisers and just find out how much it is going to cost. Sit down and look at things as to what do you actually need rather than a jerk reaction; “I can now access my pension fund and I must do so”.

Wall: That sounds a lot like also you are saying the investor, the pensioner themselves should take responsibility for themselves.

Sofat: I think so. I think at the end of the day it is their money. It is the decisions they need to make, that’s what the government has said is that actually it's your money, you should make that decision. Alongside that comes responsibility because it's what you're going to do with it that obviously is right or wrong for you.

But what you can't do is make those decisions and then look to the industry to bail you out if you happen to make the wrong decision. So I think our duty as an industry is to ensure that clients get the best options available to them in terms of guidance or advice, but it's individuals responsibility to understand that what they are looking to do with their money might have consequences in the future.

Wall: Anna, thank you very much.

Sofat: My pleasure. Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar

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