Financial advice vs guidance - what is the difference and why is it so important?
The terms Advice and Guidance are often used interchangeably when it comes to financial advice, the two, however, are inherently different.
Following the introduction of Pension Freedoms in 2015, the new pension flexibility rules allowing us to access our pension the way we want to, the government set up a service to give individuals free, impartial guidance. With such a huge change in pension rules, the need to assist people on deciding the best approach for them, personally, was clearly needed. The intention was to help people aged 50 plus with making decisions regarding their defined contribution (DC) pensions, by guiding them through the options available to them. This service is known as the Money and Pension Service (MaPS), previously named Pension Wise.
Guy Opperman, the UK Pension Minister made the following statement on pension guidance: ‘We will introduce new provisions requiring trustees of occupational pension schemes to nudge members to appropriate guidance when they seek to access their pension through the pension freedoms.’
Whilst good that the government is pushing for pension administrators to provide individuals with guidance as they near retirement, what does this actually mean for individuals and what help can they actually expect? And is a ‘nudge’ in the right direction, really enough when it comes to thousands or hundreds of thousands of pension savings?!
It is important to highlight that guidance cannot compete with full, whole-of-market, independent advice which is often viewed as the gold standard of advice, certainly in financial services when it comes to your wealth and retirement. But it’s easy to see why so many may struggle to understand the difference between guidance and advice. Why pay for advice if you can get guidance for free?
So, what is the difference between advice and guidance?
Let’s start with guidance. This is more of an information-only service which helps you make decisions yourself by leaving you better informed on the options available to you. With guidance, you will not receive any recommendations or opinion from the institution offering guidance and they will not recommend any specific products or direction for you to take.
In truth guidance can be given by anyone including friends, family or colleagues. They are there simply to give you information, but it’s down to you to make the ultimate decisions based on the information you have.
Advice, on the other hand, involves speaking to a qualified and in the case of financial services, regulated Financial Adviser. Advice is a personalised service whereby a qualified adviser conducts an in-depth analysis of your own personal financial situation as well as your personal needs and objectives. The adviser will then provide you with a detailed recommendation which may include specific products or solutions.
But what will it cost me and is it worth it?
Guidance is typically a free service, either from a Government run website, such as the previously mentioned MaPS, or potentially from your existing pensions/financial services provider. Most pension providers now offer you guidance through their website and/or over the phone, to help you make decisions in relation to drawing money from your DC pension.
Advice on the other hand is a fee-based service and as with all paid services, the costs will differ between businesses. There are also different types of advice firms which you should be aware of as this will determine the type and quality of advice you will receive. It’s worth being aware however that there are two types of advisers - Independent or Restricted.
Independent advice, which you will receive from The Private Office, is completely unbiased and covers the whole range of providers and products available on the market. Conversely, restricted advice can only be provided on a limited range of products or on a specific area of advice, for example pensions. Moreover, restricted advisers are typically tied to a particular institution, such as a large bank or life office. With this sort of advice, you cannot be sure to receive a totally unbiased view and certainly not from the whole market.
The Value of Advice
With professional financial advice, you really do get what you pay for. You wouldn’t take guidance on how to fix a broken car then go ahead and do it yourself, so why would you do this with your finances and affect your financial future plans? Replacing a car is one thing, replacing a lifetime worth of savings and pensions for retirement is another thing all together.
Your pension is the biggest investment of your life so it is worth the monetary outlay to have peace of mind that your money is in the best possible place to meet your personal future plans and goals. The value of advice is certainly difficult to quantify but one study by the International Longevity Centre has concluded that financial advice can increase average wealth by around £5,000 per annum, or around £50,000 over a decade.
The study also found that advice is particularly valuable for less affluent savers as they can take the greatest value from financial advice. In addition, the study showed that taking advice more than once, i.e. annually, saw even greater returns. Over a 10-year period, taking advice leaves individuals on average approximately 24 per cent better off than the initial cost of advice. That’s a huge value add to your retirement savings.
As if that wasn’t enticing enough, you can begin your journey to taking financial advice for free! The Private Office is currently offering a no obligation initial consultation worth up to £500 for free, for anyone with £100,000 or more in savings, investments or pensions, which allows you to speak with a qualified and regulated, independent Financial Adviser. TPO is also a Chartered advisory firm which means we adhere to a strict code of ethics, monitored by the Chartered Insurance Institute (CII). One of the highest codes of conduct in the industry.
The initial discussion or discovery meeting, will be free of any charges and can be considered information gathering and general guidance. At this stage we will get to know you better and understand your needs and objectives. We will then analyse your financial situation and issue you with a ‘Scope of Work’ outlining the bespoke advice we propose for you and how much it will cost. Once you review and accept our proposed way forward, we can then start to give you advice and make it happen.
Up until this point, there is no charge. We work on a fixed-fee basis as we prefer our fees to be transparent and given to you in pounds and pence. We believe our fees are fair value and are based on a function of time, complexity, and risk.
In a nutshell, that’s a good way to think about the difference between guidance and advice. Guidance doesn’t cost you any money and is generalised and quite high level. Advice is where it gets personal to you and your future plans – but starts to cost money. The old saying about you get what you pay for, is never more true than in the world of quality financial advice.
If you are reading this and thinking you would like to begin benefitting from the gold standard of independent, chartered, financial advice, then please do get in touch and arrange a free consultation. We will be happy to help.