Advice for the young at heart
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20 February 2014
Traditionally, the only cases where employers paid for financial advice was for staff who were about to retire. Now one of the fastest-growing employee benefits, independent financial advice is offered to all levels of employees. It can cover any aspect of finance, from the tax implications of maturing share options to what employees should do if they have an endowment mortgage.
The three biggest drivers behind this change are the move by occupational pension schemes towards defined contribution (DC) pension schemes, the increasing number of successful share option plans and a greater emphasis on benefits communications. The introduction of stakeholder pensions is also expected to have an influence.
John Dean, head of business development at financial advisers Momentum, says: "Advisers are going to become increasingly essential in the workplace if employees are going to have the information they need to make informed buying decisions." For example, when an occupational pension plan is changed from a defined benefit (DB) to a DC arrangement, the investment risk moves from the employer to employee.
"Therefore," says Martin Thompson, commercial manager for Sedgwick Independent Financial Consultants, "financial advice will be needed to enable employees to make informed decisions on investment strategy, contributions and retirement income options, such as draw-down or annuities".
Companies with large occupational pension schemes may find that they, too, need to supply members with more advice as the stakeholder option comes into its own.
Thompson says: "The concurrency regulations introduced through stakeholder pensions will add an additional layer of complexity for employees who are members of occupational pension schemes. Members will need to reappraise whether additional voluntary contributions continue to be the best route for top-up provision."
Nigel Ranger, head of corporate benefits at Massow Financial Services, believes that stakeholder pensions will be the starting point for smaller employers, after which they will look at providing a better scheme. "Some employers prefer to pay money and the employee gets a one-to-one meeting with an adviser, rather than a take-it-or-leave-it scenario, providing access to a stakeholder provider," he says.
Share option plans are being heavily promoted in the UK. Little personal financial advice is needed at the launch, but when it comes to the final payout - and there have been some extremely large ones recently - it can be daunting for employees who have never before received so much cash at one time. "Advice is very important for these employees, where potentially they could be holding a very large proportion of their overall wealth in a single share, which is a high-risk strategy," warns Thompson.
Share schemes is still a relatively small area for financial advisers. "It's more common in the US than here," says David Wrenford, senior consultant at HR consultancy company William M Mercer. "But when things are taxable, that advice really needs to be provided."
In the UK, corporate financial advice has been around for about 30 years. Tudor Taylor, director of financial advisers Towry Law, says that financial products mushroomed in the 1950s and 1960s, and as they became more complex, the need for financial advice increased. "Financial advice was always there, but the complexity wasn't," he says.
Employers began providing financial advice for employees in the 1970s with the first large-scale redundancy programmes. Pension scheme membership grew, and by the 1970s some employees had accumulated up to 30 years worth of credit. "Employers recognised that these employees were receiving amounts of capital that they had never expected and never had before, and most didn't have the experience to handle or manage it appropriately," says David Cassidy, chairman of Nelson Money Managers. "Hence the move to provide access to financial advice."
David Wright, director of financial planning at Alexander Forbes Financial Services, says: "It's no longer seen as a perk - now it's a necessity."
The big advantage of providing financial advice is on the legal side. If an employer appoints an independent financial adviser (IFA), it takes full responsibility for the advice that is provided to an employee. But Cassidy warns: "Employers must make it clear that it's ultimately the employee's responsibility to decide whether the advice that is provided is appropriate, and that by facilitating the introduction the employer will not monitor and cannot be liable for any advice provided."
However, because an employer needs to avoid being perceived as giving unregulated advice itself, Taylor points out: "There's greater protection in having an IFA than not having one."
Often, by telling staff about their benefits, employers spark a demand for even more information. There is also a greater public awareness of the importance of personal financial planning, and so more employees are looking for advice long before retirement.
"Increasingly, employers are responding to employees' requests for assistance with financial planning mid-career, to allow time to plan their finances for retirement, rather than waiting until it's too late to do anything," says Thompson.
However, an alarming number of employees are burying their heads in the sand. David Wright, at Alexander Forbes, says: "What is a bit frightening is that employees still think the employer will look after them [after retirement]. They're still a bit too naive and trusting."
Those organisations that do offer advice can reap the advantages of benefits promotion. Through financial advice, employees get to understand benefits such as private medical cover and life assurance. "Many employees don't appreciate their benefits package or the money put into it," says Ranger. "They often think their employers are tight, when they actually have great benefits." It helps when a third person points this out.
Dean at Momentum believes that technology will reduce the cost of financial advice as it will require less of the adviser's time. He says that some employers use the adviser for counselling and the product supplier for data advice. Also, intranets can be used to present the differences between, say, Isas, alternative voluntary contributions (AVCs) and stakeholder pensions. Employees can chose the options that suit them best. "It provides a way for them to access advice which they'd never had before," says Taylor.
According to Employee Benefits magazine and Watson Wyatt strategic reward research, about 13 per cent of flexible benefits plans include independent financial advice. And this proportion is expected to increase in the future. But Wrenford is not enthusiastic about financial advice as a benefit. "We don't see it to be a big winner actually," he says, pointing out that under a flexible benefits plan employees would rather buy holidays. "Employees have this perception that they can get financial advice free elsewhere," he says.
In Wrenford's experience, when flexible schemes are first launched, employers often offer personal financial counselling, and then use a helpline after a year or two. Thereafter, many employers do not use them.
Dean says that although there are many financial advisers in the UK, only a handful provide services aimed at the corporate market. He recommends that employers should tender adviser services to ensure they are suitable, and that typical tender criteria should include: staff qualifications (because not all IFAs can advise in all areas of business); what training and business support can be expected; whether IT systems will be compatable; how satisfied other clients are and how long clients stay with a particular provider; whether any awards and/or recognised quality standards have been earned; and references from other clients.
Large employers with sites all over the UK would probably prefer to go for a large provider to avoid dealing with many individual advisers. Small organisations may be happier with a local IFA so as to build a relationship.
An ongoing debate is whether to pay fees or commission. Historically, advisers have worked "free" for companies on the basis of generating commissions from staff. "This is still the most common approach," says Dean. "However, many employers now think staff get best value from products when no commissions are payable and fees are underwritten by the company."
Most providers agree that fees, rather than brokers working on a commission, are best for the initial meeting. This will avoid any potential for employees to feel pressurised into buying.
Thereafter, opinions divide. Wright believes that after the initial meeting it is a good idea to switch to a commission basis. "Benefits are sold, not bought," he says. He thinks that some large consultants only tell employees what they need, but do not follow through to ensure they act on the advice. "There needs to be a degree of aggression [to sell a product]," he says.
A preretirement session, costing about £325-£350, will research the person's pension, provide a one-to-one meeting, go through all their other policies and produce a bespoke report. Otherwise, IFAs can charge an hourly rate of about £160 per hour plus VAT. A two-hour session would typically cover a fact-finding meeting and a summary report, but no investment advice. A five or six-hour session would include a full report, including investment recommendations, a second meeting and the implementation costs.
It is cheaper if six to eight employees share a session, for which they can be charged by the day or half day. n