Financial Advice Supplement 2003: Theory – Staff need financial advice more than ever before

The arrival of independent financial advisers (IFAs) in the workplace coincided with changes to pensions legislation and the introduction of complex executive and employee share schemes. Just as employers sometimes struggle to get to grips with such issues, so employees need someone they can trust to unravel the financial mysteries behind benefits. This is even more the case when they must make choices about pensions and shares through a flexible benefits scheme. Under these plans the employer passes on much of the risk of the benefit choices to the employee, but staff rarely have access to the same level of expertise that the employer did through benefits consultants and trustees. IFAs, of course, do not provide financial advice out of the goodness of their hearts, and see the workplace as an ideal way to reach hundreds or thousands of new clients. They must therefore persuade employers that their presence is of real benefit to employees, as well as making sure that the adviser’s time is spent wisely. Some IFAs argue that employers have a duty of care to provide their workforce with financial advice. Clive Ellston, a consultant at Towers Perrin, says the move from defined benefit (DB) to defined contribution (DC) pension schemes (including group personal pensions and stakeholder schemes) means that employees are shouldering more risk and must know the best way to make sound investments. Unfortunately the government has been slow to acknowledge the role of employers as conduits of financial advice. It has ignored a recent call by the Association of British Insurers (ABI) for tax credits to be offered to employers that make advice available to their workers. “There is no incentive for employers to provide financial advice,” says Emma Grainge, pensions spokeswoman for the ABI. The Pensions Green Paper, published in December, went little further than acknowledging the need for greater financial literacy among employees. Media headlines on the pensions savings gap and DB scheme closures have made employees more aware of the need to make financial plans, but many are overwhelmed by uncertainty and insecurity. Tony Newman, from the employer solutions department at Nelson Money Managers, says IFAs such as his are facing a boom. “People have got to be educated. In the past they have taken pension schemes for granted. That’s no good anymore. They must save money and must know where their savings are going,” he says. Conversely, saving into employee share schemes is very popular where it is offered by companies. But without the right advice, employees might pay more tax than necessary or be tempted to invest too much money into a single company (usually, the one they work for). But by law employers cannot provide advice on how staff should invest their money. Martin Osborne-Shaw, director of employee share services at Killik & Co, says it is vital employees understand tax and other issues. “Financial advice is gaining momentum, but it’s still only a minority [of employers] that offer this sort of service.” Besides bringing in IFAs to guide staff through complex pensions and share scheme issues, employers sometimes provide the benefit of financial advice through a flexible benefits scheme. Lynne Maltby, flexible benefits director at MX Financial Solutions, says that the growth of flex schemes means employees have “more strings to their bow”, but they must be able to decide which financial products are best for them. Sometimes employers pay for staff to receive financial advice as part of a flex scheme, and include it in the running costs, making it free to staff. Elsewhere, advice is seen as a benefit in its own right. The disadvantage of offering financial advice through a flex scheme is that staff can usually only make choices once a year. So if they do not choose financial advice, and then half way through the year need it, it might be difficult to access. As a result some employers have taken it out of their flex schemes and offered it as a voluntary benefit instead. Unsurprisingly, take up rates are low when employees have to pay for financial advice themselves. Mercer Human Resource Consulting estimates that take up will only be about 1%. “It is not a very popular flexible benefit,” says David Wreford, a principal consultant at Mercers. “The principle reasons are high cost and the fact there is little perceived benefit for those on anything but relatively high earnings.” But IFAs are at pains to point out that financial advice can benefit people on low and medium earnings as well as high earners. Some offer complete financial healthchecks for employees and their families which, they claim, can even end up saving money. Trevor Williams, commercial development manager at Sedgwick Independent Financial Consultants, gives an example of an employee in a flex scheme who may choose to drop private medical insurance because they are already covered by a partner’s policy. “We give them a personal assessment which can become an overall plan for themselves and their family.” Although the financial services industry is more tightly regulated than in the past, IFAs still have to overcome scepticism about whether they provide an impartial service. John Robbie, corporate development manager at Momentum, accepts that the industry has not had the greatest reputation, but insists that it is changing. “The quality has improved significantly over the last five to ten years, but it still has to be paid for,” he says. Maltby agrees the industry as a whole suffered because of scandals surrounding things like the mis-selling of pensions. “All we can do is offer the best service we can and make sure that the advice we give is as sound as possible,” she says. Of course the flip side to savings and investment advice is debt counselling. With the increased use of credit cards and record breaking mortgage lending levels, debt levels among UK consumers has soared. Alan Goodman, chairman of the consumer financial support committee for the Institute of Actuaries, believes that debt management is more of an issue for about 90% of the workforce than wealth creation. Employers which want to help staff with debt problems usually choose to offer an employee assistance programme (EAP) that includes a financial advice helpline. For example, Associated British Ports offers an EAP which has a high take up. It attributes this to the attractiveness of the debt counselling helpline. Questions and tips • Check that an independent financial adviser (IFA) is registered with the Financial Services Authority (FSA) (020 7676 1000 or visit IFAs must register with the FSA if they offer advice on pensions or share schemes; and, from 2004, will also be required to register if advising on insurance benefits. • If an IFA firm is offering advice on insurance benefits, also ask whether it is a member of the General Insurance Standards Council (GISC) (020 7648 7800 or visit Membership is not obligatory, but the GISC is the professional body for more than 6,400 insurers and intermediaries. • Make sure that the IFA has made it clear in its terms of business letter whether it is charging for the advice it offers or expects to earn commission. These terms should be passed on to employees. • Enquire whether the IFA specialises in any particular form of benefits (for example pensions or share schemes) or deals with across-the-board services. Will it be offering to carry out a complete financial health check on employees or just provide benefits info? • Check that the IFA remains liable, through indemnities or otherwise, for poor financial advice. • If you are satisfied with an IFA, look into a long-term relationship. Both parties will gain if an IFA is more familiar with your staff benefits. Research and studies • One in five employers offers independent financial advice as a benefit to all staff, according to surveys carried out by IFA firm, Momentum, in 2002. A further 13% of larger organisations offered financial advice to selected employees, compared with a further 6% of small and medium-sized enterprises. • The Employee Benefits Strategic Reward Research 2002 found that 23% of employers offer financial advice or counselling as a benefit. • A survey for Towers Perrin, carried out last spring by Mori, showed 78% of employees want their employer to provide financial education. • But it also revealed ignorance among employees about the nature of IFAs. Just 11% could correctly identify an adviser while 22% mistakenly thought they did not earn commission. • The most authoritative study into financial advice, published by the Institute of Actuaries in February 2001, found that both employers and employees are keen on using the workplace to provide advice – but each expected the other to pay for it. • The report, based on an inquiry chaired by Sir John Banham, recommended that workers receive at least two hours of financial advice per year. Employees, it found, were frustrated by the information and advice available. But they did not want a service that was too heavily geared towards selling certain products, preferring a more general financial healthcheck. • A survey by Tisco (formerly the Independent Stakeholder Company) in December 2002 found the average take-up of stakeholder pensions when a scheme is explained to them by an IFA is 42%, compared with less than 1% when it is not. Further informationFinancial Information and Advice Opportunities in the Workplace; from the Institute of Actuaries, Staple Inn Hall, London WC1V 7QJ (020 7632 2100 or visit • Search under financial advice at IFA fees versus commission Independent financial advisers (IFAs) are not charities and have to make money like everyone else. Their income normally comes in the form of a fee paid by the employer or employee – or through the commission earned when a employee decides to buy a new investment product. IFAs say they prefer to work on a fee basis. In that way, there can be no doubt that the advice they are giving is independent and not influenced by the commercial relationship they have with benefits providers. “People are entitled not to want a sales pitch,” says one adviser. But cost conscious employers often take a different view. Tom McPhail, pensions development manager at Hargreaves Lansdown, says many employers are unwilling to pay for advice. Instead, the employer ends-up providing basic information and then waiting for employees to come forward and say they are interested in a product. Advisers working for Hargreaves Lansdown are charged out at ¬£125 per hour, which means an employer could easily end up paying ¬£250 for one of their staff to have a two-hour session. “Sometimes they are reluctant to make that commitment,” says McPhail. Laurence Houlden, group development director at RJ Temple, says there is a reluctance among the public as a whole to pay for financial advice. This means IFAs are forced to earn commission, but they must reveal what they stand to earn from different products or services. “Providing it’s disclosed up front and clients can see which products lead to commission, then they have a choice,” he says. The Financial Services Authority (FSA), which regulates the industry, says IFAs must disclose the amount of commission they earn. To prevent abuses, the FSA requires advisers to notify the authority if they earn more than 20% of their income from a single provider. But there is an argument that, if financial advice truly is a benefit, it should not be dependent upon IFAs earning commission. Nelson Money Managers charge employees a fee – but only if they opt to buy one of the products introduced to them by Nelson. “With a commission-based system, we could only recommend investments which pay commission,” says Tony Newman, Nelson’s national marketing manager. Trevor Williams, commercial development manager at Sedgwick Independent Financial Consultants, says the employee perception of financial advice is different if staff know their employer is paying for it in the form of a fee. “They see it as a fully-endorsed service,” he says.