Transforming personal finance since 2011

#53 — Financial Advice in the UK

October 23rd, 2019

By Andrew Craig

Reading time: ~ 9 minutes

Hardly a week goes by without me fielding an email from someone asking me for financial advice, invariably after having read my book. It is not uncommon for someone to get in touch, say something very kind about my book (which is very much appreciated of course) and then give me detailed chapter and verse on their personal financial situation and ask me specifically what they should do.

Given how often I have to reply to these sorts of emails, I wanted to take some time today to explain to our entire readership a bit more about how financial advice works (or, more pertinently, quite often doesn’t work) in the UK.

The key point here is that anyone seeking to give specific, personalised financial advice in the UK, is required by law (by the financial regulator, the Financial Conduct Authority) to conduct a detailed 'fact find' process with someone before they are permitted to give such advice. (This is true for regulated investments such as shares, bonds and funds at least. Sadly anyone can say anything they like in unregulated investments such as bitcoin. I think this is an absolute scandal personally - and has been and will be hugely damaging for so many people's finances, but I digress...).

The fact find process I mention above is also called a 'Know Your Client' or 'KYC' exercise. The idea is that any financial adviser must ensure they give 'appropriate' advice. This is obviously, quite rightly, aimed at protecting the consumer from bad or inappropriate advice, to minimise the chance that people lose money, take on more risk than is appropriate for their personal circumstances or do something fundamentally silly like make investments whilst they still have significant expensive unsecured debt (such as credit card debt or a bank loan).

Conducting this 'fact find' or ‘KYC’ process involves a fair bit of time and effort. There will need to be a face-to-face meeting in someone's home or office, or a long phone call or series of phone calls in order for the financial adviser to get the full understanding of that person's entire financial picture that they are obliged to get by law.

This will include details about:

  • income and expenditure,
  • mortgage or rent,
  • other debts,
  • any current investments,
  • existing pension arrangements,
  • attitude to risk,
  • long term financial goals and so on.

A fact-find or KYC document done properly will be a long and detailed piece of work. An adviser will then spend many more hours to prepare an investment report which provides appropriate, specific and personally tailored recommendations.

Although I have passed the requisite exams to give financial advice, I don’t actually do this business. I just don’t have the bandwidth to be travelling around the country doing face-to-face meetings, fact-find questionnaires and the preparation of detailed personal investment recommendations.

"Why won't you help me?"

I confess that over the last few years this reality has created its fair share of "cognitive dissonance". A meaningful percentage of the population has no functional grasp of how these rules work, nor how strict they are. This means that reasonably often when people get in touch with me with details of their financial situation and to ask me for advice, they can then get really quite upset when I try to explain that this just isn’t something I can do. It is quite literally illegal for me to give someone any kind of personal financial advice without going through the process I have explained above.

There are many hours of work required to get into a position where I can legally give someone personal investment advice. It is also worth highlighting that the costs of doing this business are significant - including the costs of regulation and compliance, ongoing compulsory education and training every year, liability insurance, employing staff, travelling around the country to meet with people and learn about their financial situation and lots else besides.

I have to admit that I do find it quite depressing how often people just don’t (or won't) understand all of this and can then get really quite angry that I’m not willing to give up many hours of my time gratis and fund tens of thousands pounds a year of cost out of my own pocket in order to give them free personal investment advice. Many simply don't understand there are no short-cuts here given how the regulation works.

Write for free until you get paid…

This having been said - I am a big believer in Mark Twain’s idea that you should "…write for free until you get paid..." and I am genuinely keen to help people as much as I can with their finances within the confines of what is permissible and possible. Since founding Plain English Finance, I have conducted several hundred phone calls and replied to several thousand emails without charging for my time (I suspect more or less strongly that vanishingly few other fund managers are willing to do this) - but I would hope that people understand that I really can’t be expected to break the law. I’m sure my wife would enjoy me being away in prison for a little while but at some point, she would hopefully want me back, if only to help raise our family.

The Advice Gap

So, the provision of personal financial advice is extremely time consuming and expensive. Financial advisers will have to go to the all the effort of travelling around the country and do a great deal of work in order to be able to give legally appropriate financial advice as I've said. Bear in mind that they will also have to do all this work for people whether they become customers or not - so they have to price in a meaningful number of people who decide not to become clients in their business model - driving the costs up even further.

To make this work economically and actually make a living, therefore, the cost of this sort of personally tailored investment advice is necessarily high - and actually, sadly, prohibitively so for the vast majority of people.

As the FT has put it (paywall), regulation of financial advice in the UK has “…priced small investors out of the market by making it uneconomical for IFAs to advise anyone but the extremely wealthy.” This fact has attracted a great deal of press coverage in recent years and is generally referred to as 'the advice gap.'

So what have we done about this reality?

Our stated mission is:

To improve the financial affairs of as many people as possible.

This advice gap has been one of our biggest challenges in the years since we started the business.

Our reaction to this has been to do as much as we can within the boundaries of what is permissible and the main vehicle for this has been that we set up something called the Plain English Finance Community.

The community is an ongoing source of financial education, inspiration and the accountability that goes hand in hand with being part of a group of like-minded individuals on a similar journey.

It is hosted in an exclusive Facebook group and designed to help you get your financial house in order. The group exchanges views, ideas and opinions about personal finance. We would like to think that being part of it significantly increases the chance that you will take action to get your finances sorted once and for all. This is the ultimate purpose of the whole thing.

The group is open to anyone, from those who are just getting started on their financial journey, to seasoned investors - many of whom often share their knowledge with the rest of the community. We have only ever sent one email out explicitly marketing the fact that the group exists (for a number of reasons which I will explain in the weeks ahead), but there are more than 340 people in it at the moment this fact notwithstanding. This includes one of the leading financial analysts in the city and a number of very experienced and successful professional investors – some of whom are from multi-billion pound investment funds.

As such – we like to think that the group is an incredibly useful ‘brain trust’ for anyone interested in getting their financial house in order.

Our hope is that anyone joining the group massively increases their chances of doing the admin' required to succeed with their finances.

Even if they don't manage it in week one, the chance they get the admin' done increases every time someone posts or there is a debate about how to do the best with your money.

The evidence, so far at least, is that this has worked for plenty of our members. To quote a couple of them:

"Thank you for all the hard work. Thanks to your book and this group I'm well on the way to financial freedom... it has given me the confidence to actually start investing!"
– Conrad R.

"Andrew what can I say but thank you! ...This group has provided me with access to so many like minded people with whom I’ve had amazing conversations... "
– Matthew S.

It is important to understand that the group is NOT a forum for giving members specific investment recommendations or personal, tailored investment advice for all the reasons I have outlined above. Of course we encourage discussions and questions on lots else besides and I am more than happy to discuss different funds, other investments and lots else besides as quickly as I am able to, but this can only ever be in general terms and never as a specific personalised recommendation.

The primary purpose of the community, then, is to give you access to reasonably timely support with all the "process" type questions that people so often have about getting their finances sorted: The types of account you might use (ISA, SIPP etc...), direct debits, which brokers, how much you might save, what to do about property… In the same way that you might pay Microsoft, Apple or any number of other companies to ask a human being to help you rather than have to settle with the FAQ page - it is a helpful resource to give you the fastest route from A to B with your finances..

I would also note that by now there is a significant "edifice" of content that has been building for several years and which members can search in their own time.

The "Complete Guide"

Importantly - when you join the PEF community, you will also receive a copy of our "Complete Guide to Owning the World" - a 32 page document designed to help you get your finances humming. Many other companies charge people £99 or even £149 for this kind of document. We provide it for free when you subscribe. You can download a sample to see what it is all about...

Please do consider joining our community. We would love to welcome you and we know from experience that being part of the group can have a huge positive impact on your financial situation in a short space of time... It is our attempt to bridge the 'advice gap' as best we can...

(For the avoidance of doubt - you can cancel your membership any time you like if you don't feel that you're getting value from the group...)