Taking a look back over how the world of personal finance has changed in the last 15 years, Merryn Somerset Webb finds that she’s pleasantly surprised…
If you think the world of financial services is complicated and rapacious now, you should have seen it 15 years ago when we launched MoneyWeek. Back then, if you went to a financial adviser (IFA), you went under the impression that all the advice and help you were given was free. You didn’t know that for every product you bought, the adviser got an initial, and then an annual, fee from the product provider – every year for as long as you held said product. If a fund came with an annual fee of 1.5%, a good 0.5% of that found its way back to your adviser every year.
It was, I wrote when we were lobbying for change back in the early 2000s, a bit like buying a house and then having to pay for the estate agent to go skiing in Meribel for every year you occupied it thereafter. It also automatically baked commission corruption into your investment cake. Consciously or unconsciously, advisers tended to recommend high commission products over low commission products, and to completely ignore no commission products (such as investment trusts).
Almost more ridiculous was the fact that even if you bought your fund directly from the fund manager, you still had to pay 1.5% rather than just the 1%. Why? So as to protect the IFAs’ businesses. Not good. Not good at all. There was also no real way to find out what a fund actually cost – the annual management charge included a tiny part of the final cost and there was no other measure.
Costs, costs, everywhere
This lack of transparency was a core part of the industry. Most loans of all kinds came with payment protection insurance (PPI) attached. Most people didn’t know they had it and didn’t know what it cost (I spotted it on my own first mortgage and had it removed). Other insurances didn’t come easy either. If you wanted to find cheap car insurance, you had to make five phone calls first to check rates.
It was the same with pensions. When you reached retirement age you had to buy an annuity with most of your money – and if you didn’t want to be stuck with the rubbish deal offered by your insurer, you had to take up your open-market option and call around all the others looking for a better deal. Thinking back, pretty much the only financial product I can think of that was simple to get was a mortgage! All you had to do was walk into a bank and ask for a pile of cash. Assuming there was a house involved, you walked out again with it 30 minutes later. Easy.
A miraculous improvement
Things have changed. And amazingly, miraculously, they have changed for the better. I remember the first time I saw an insurance comparison site. It took me ten minutes to renew my car insurance rather than an afternoon – once the stuff of dreams. So the internet has helped. It has given us comparison sites for everything (not perfect, but a huge improvement).
It has given us the hugely competitive world of online stockbrokers – where we used to pay ad valorem fees for every trade, we now pay super-low flat fees. The same goes for our individual savings accounts (Isas) and our self-invested personal pensions (Sipps). Cheap self trading is around now in a way I don’t think I dared dream it would ever be in 1999.
Better still has been the introduction of the retail distribution review (RDR). This outlawed the commission system and insisted that financial advisers got themselves a little more education in money matters than they had in the past. Now if you go to an adviser, you will know if he is independent (ie, he is looking at all the products on the market for you), or restricted (he only looks at part of the market) and, crucially, you will also know what he is costing you. No kickbacks allowed.
The advice might not come as cheap as it should, but at least the price is transparent. We are also beginning to see the rise of ‘robo advisers’ – websites that can take your personal details and come up with a cheap and simple suggested portfolio to suit your needs. If they can be done well (and I think they can), we will be fans of these at MoneyWeek: the easier saving is, the more we reckon people will save.
Serious progress on pensions
On to pensions. This has long been one of the most disgracefully exploitative parts of the market. But here too there has been progress. The new ‘freedoms’ mean that there is no longer any compulsion for retirees to be ripped off by the annuities industry. Instead, we all get to keep control of our own cash for as long as we like. This doesn’t come without its problems – we are hearing a huge number of complaints from readers about the high costs of drawdown and about the distressingly low rates of interest that drawdown providers are paying on cash. But as far as we are concerned, it represents serious progress.
The same goes for the Isa regime. We like the way expensive and inflexible child trust funds have given way to junior Isas, the way Isas can now be inherited by spouses and the combining of the cash Isa and stocks and shares Isa regimes. It’s good. This is not to say there isn’t a way to go. There is. We suspect the pensions regime will need more change (we are all for pension Isas – Pisas). The regulatory environment for robo advisers needs clarifying. Traditional wealth managers have some serious work to do on the transparency of their fee structure.
And while the residential mortgage market has been tightened up (say hello to the 15-page mortgage application form), the buy-to-let market has a way to go. However, overall, when it comes to personal finance the story of the last 15 years is a good one. The industry still regularly shocks me. But not nearly as much as it did in 1999.