Advice and guidance can often be considered synonymous concepts. However, important distinctions must be made when it comes to financial planning.
In December, Harriet Baldwin MP tabled an amendment to the financial services and markets bill. The purpose of this would be to give the Treasury the power to make provisions for Britons to access personalised financial guidance from appropriately regulated financial services firms.
That policymakers are highlighting consumers’ need for better access to information to help them make financial decisions is a step in the right direction – particularly in this challenging economic climate.
Indeed, recent research from My Pension Expert found that only 35% of UK adults are confident that they’ll be able to retire when they want to. Double-digital inflation and rising interest rates have taken their toll on people’s retirement plans, with 55% stating that the cost of living has made retirement feel impossible.
As such, millions in their 50s and 60s are choosing to delay their retirement date, feeling they must bolster their finances much more before being able to stop work. Moreover, financial planning has become a challenging task – 43% of UK adults surveyed by My Pension Expert said that the current economic climate had derailed their financial plans.
So, any move to provide individuals with information about their finances, particularly their pensions and retirement planning, is commendable. However, to return to the opening point, the topic raises an important question: what is the difference between financial guidance and financial advice? And why does that even matter?
Broad information versus tailored recommendations
While both can be helpful in different ways, there are several reasons why financial advice typically has more value than guidance.
The Financial Conduct Authority (FCA) states that guidance “can help you understand the different investment options before you decide for yourself how to invest your money”. It is usually free, unregulated information to assist people with what they “could” do to organise their financial affairs.
Guidance can include a broad range of basic financial information, including on financial products such as pensions and investments and more general guidance on budgeting and debt management.
However, because of its more general nature, financial guidance does not take into account an individual’s circumstances, needs or goals. This makes it a less effective tool for creating the right financial plan. Indeed, where retirement is concerned, one has to take into account a person’s existing savings and retirements, their debts, their earnings, retirement, their risk appetite, when they want to stop working, and the lifestyle they want to maintain during retirement. Only then can an effective strategy be implemented.
That is where independent financial advice comes in. It is regulated by the FCA and involves a detailed review of an individual’s complete financial situation, including retirement savings, circumstances, and goals.
An independent financial adviser (IFA) will take the time to examine a client’s income, expenses, savings, and assets in order to determine the client’s financial objectives and risk appetite.
As advice is regulated, clients who receive it are protected by the Financial Ombudsman Service and the Financial Services Compensation Scheme. It should also be noted that in order to provide legitimate advice rather than guidance, a firm and its advisers must be authorised and regulated by the FCA. For those unsure as to whether a particular firm is legitimate and offering the right service, the FCA Register can provide such confirmation.
Making a decision
Understandably, people approach retirement with some trepidation. It represents a significant change in lifestyle as they look to wind down work and make the best financial choices with their pensions and finances to maximise their well-being in retirement. Making the right choices without advice can be challenging and often overwhelming.
Of course, advice will come at a cost. These costs will vary depending on the service provided. For example, an ongoing advice fee can range from 0.25-1%, while one-off fees might come as a fixed sum. However, consumers must consider the value advice can offer.
In taking on tailored advice, an individual is able to make their money work in the most efficient way to achieve their particular goals, all without hindering their existing financial circumstances. Financial advice can be hugely valuable when developing a sustainable financial strategy within a volatile economic market – like the one we are all living through now. And while there are charges involved, the long-term financial value it can offer to clients could certainly outweigh the fee many times over.
As we can see from MP Baldwin’s amendment, the issue of improving access to financial support has been noticed in Westminster. That is promising. Indeed, promoting financial literacy and planning among Britons should always be welcomed.
However, it is important to note that guidance should not be considered a substitute for professional advice. Rather, guidance should be viewed as a means of establishing a strong foundation of financial knowledge, upon which individuals can build upon through advice.
There is simply no replacement for the benefits and security that come with receiving expert advice from a qualified and regulated adviser, especially in today’s economic climate. Accordingly, we must challenge the misconceptions around the cost of financial advice and the notion that it is only necessary for individuals with complex financial portfolios. In doing so, Britons will be able to develop a retirement strategy that works for them and allows them to achieve a financially secure future when they leave work.
About the author
The above guest feature was written by Andrew Megson, the CEO of My Pension Expert, the UK’s number one advised retirement income specialist (as rated on Trustpilot). Founded in 2010, FCA-regulated My Pension Expert specialises in providing independent advice to UK consumers about their pension plans – it arranges millions of pounds worth of retirement income options each week. The company is entered on the FCA Register № 579999.
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