Saturday, 13 June 2020

FIND GOOD FINANCIAL ADVICE

How do I find a good financial adviser? It's a question I am often asked. And there is no easy answer. Especially if you do not have a lot of money.  


My first question is do you need financial advice? Unless you have a big lump-sum (tens of thousands of pounds or more) or a lot of surplus income to invest (hundreds of pounds a month) you probably don't need financial advice and probably will not want to pay the fees good advisers charge. See free financial advice below for other services that can help you.  

But if you do want regulated financial advice then here is my guide. Many people first want or need advice when they think about exercising their new pension freedoms. Some with a fund worth than £30,000 or more which comes with a guarantee have to take regulated financial advice before they can transfer their money out either to another pension or, ultimately, to cash.

I have three filters to sort the best advisers from the others. 

Filter One - Independent
Only ever use an Independent Financial Adviser. This term is now regulated and policed under EU rules called MIFID II which began on 3 January 2018. Now that the transition period is over and the UK has left the ambit of the EU these rules have become part of UK law and the Financial Conduct Authority polices them.

Under these rules there are two main sorts of financial advisers.

The sort you want is called 'independent'. That can mean one of two things.

1. They give advice on all financial matters and looks across the whole of the market and give that advice on any financial topic where they might recommend a product.

2. They give advice on a specific type of product - such as annuities or pensions - and not on other types of product. But they must still look across the whole of the market relating to that product. This may be called 'focused independent' or may just be called 'independent'.

Any adviser who is not independent does not look at the whole of the market and may be tied to one or more firms and can only recommend products from those firms. In the UK these advisers are called 'restricted' though hardly any of them used that term. Never ever use an adviser who is restricted by products. If you ask 'do you offer independent financial advice' and the answer is anything but a clear 'yes' then reject them. Many work for a bank or insurance company and of course only recommend you buy their products. That is just sales masquerading as advice.

A lot of advisers will be rejected by Filter One. The only way through it is to become independent.

Filter Two - Planners
Only ever use an IFA who is a chartered or certified financial planner. The very best qualified financial advisers are chartered (or certified) financial planners. This brings you down to the best qualified 6000 or so of the 33,000 regulated financial advisers. They are beyond what is called QCF Level 6. So they have put a lot of effort into being the good guys and the chances of a bad guy (or gal) remaining in there is small. Some firms are chartered which means that at least some of their advisers are chartered themselves and the rest are probably working towards it.

Lots of good advisers will be rejected by Filter Two. Sorry. Get the qualifications.

Filter Three - Payment
My general position is only use a financial planner who you can pay in pounds. Do not choose one who wants to charge you a percentage of your money. You earned, made, or inherited it. Charging a percentage is like taxing your wealth. Even HMRC is not entitled to do that. 

Percentage fees are a hangover from the days of commission when advisers lived on a percentage of your money they were paid year after year. If you cannot afford the fee in pounds then you probably do not need or cannot afford financial advice. 

However, in some very limited circumstances a small percentage charge - say 0.5% or so - can be better value than paying in pounds. But always make sure that:
  • you know each year how much has been taken from you so you can see if it is value for money.
  • you review the service you get every year and if it is poor, find another adviser.
Ideally you should also pay upfront from your non-invested resources rather than out of your invested money. One drawback of that approach is that a fee taken out of your pension fund comes from money which has already had income tax relief. So ultimately that fee costs you less than if you paid it out of your taxed income. It is all part of the massive taxpayer subsidies for the financial services industry (relief from VAT for finance and insurance costs £11 billion a year). That was originally an EU law but is very unlikely to change once we have finally left the EU in 2021. If you must, then pay in tax-subsidised pounds from your pension fund. But ideally - and with all other investments - pay in pounds out of your non-invested resources. That way you see the money you are paying and can ask yourself – is it worth it? And unless it is good value and you know what it is and what you get for it never pay a wealth tax to the adviser from your fund. 

Contingent fees
One iniquitous method of charging grew up around pension transfers. If you have a good company pension that promises you a pension related to your salary - called Final Salary or sometimes Career Average schemes (they are branded Defined Benefit or DB schemes by the industry) you may be tempted to transfer it to a pension pot scheme - a money purchase or Defined Contribution (DC) scheme.

Transferring out of a DB scheme into a DC scheme can seem very tempting because you will get a massive amount of money to move away from the guaranteed DB pension. And then if you choose to do so you can cash some or all of that pension in. It is almost always a bad idea. In the past some financial advisers who would deal with this for you (you have to get advice if your pension is worth a transfer value of £30,000 or more) charged on a 'contingent' basis. That meant you only paid them if you took their advice and transfered your fund. Such fees created a conflict of interest between you and the adviser who was only paid if you transfered. The FCA finally saw sense and banned contingent fees from 1 October 2020. 

The difficulties of advising people about pension transfers and the cost of insurance mean that relatively few advisers will handle this business. Esepcially if you do not have a very valuable pension. 

Next steps
These three filters will take you a long way towards finding good, safe, but often expensive, financial advice. There may be adequate or even good, safe, and perhaps cheaper advisers which have been filtered out. They can get themselves through my three filters by becoming independent, getting financial planning qualifications, and changing the way they charge.

I must also add that there are a small number of well qualified independent financial advisers who have given dreadful advice (especially about pension transfers), have gone out of business, or have even turned out to be crooks. So these three filters are not a guarantee but they are a good start.

Website research
You can apply your three filters using online directories of financial advisers.

1. Adviser Book is the newest directory and my favourite. Unlike the others no-one pays to be included. It has the complete list of more than 12,000 FCA regulated adviser firms on it but it does not yet list individual advisers separately. It clearly states who is verified as independent and you can filter by qualifications and specialisms. You can also filter by independent and how fees are charged.

2. Unbiased was the first real attempt at a comprehensive database. It says it lists more than 18,000 independent financial advisers. Restricted ones should not be on there. Advisers get a basic listing free but they must pay a subscription to be directly contactable through the website. You will see a list of the 'top 20' near your postcode which unbiased says is based on how near they are to you.

You can use the site to apply my filters. You can also make other choices such as specialisms or qualifications. You can even pick a male or a female adviser.

3. Vouched For uses its algorithms to provide a list of advisers for you. They are ordered to take account of how local they are to you, reviews by customers, and ratings. Advisers cannot pay for a better position in the list. The site checks qualifications by asking for an image of the certificate.

You can filter by speciality and each entry shows clearly if the adviser is independent or restricted - always reject the latter of course. It will also show the minimum amount of money you need for them to take you on as a client. 

Vouched For lists about 5000 financial advisers who choose to pay the fees to be included. 

Other listings are available but they are much less useful. The Personal Finance Society lists all the advisers who have its qualifications and are Chartered Financial Planners, or are on the way to becoming Chartered, or work for a firm which is Chartered. That is a useful check. But it does not indicate if they are independent.

Next steps
After using these sites and checking for independence, qualifications, and how they charge, you should then pick two or three you fancy.

I would only use an IFA who has a website where you can find out more. Ignore the slick sales patter which usually reads as though it is generated by a PR machine. You'll find similar meaningless platitudes on most of them.

Most adviser websites do not tell you how much they charge - I would tend to pick only those that do. Certainly make that your first question when you meet them.

Most advisers will give you one free session. Go prepared with details and information about yourself. Try two or three and see which you prefer. Do not be embarrassed to say 'no' to them.

If you pick an adviser but later regret it you can leave by just writing them a letter telling them that they are no longer your adviser. Ask them to return any documents and destroy all your data. If you feel you have been badly advised or locked into investments you did not want, then complain and pursue the complaint to the Financial Ombudsman Service.

Free financial advice 
If you want financial advice outside the regulated professionals, then try the free, Government approved Money Advice Service whose website is very good on a whole range of money issues, some of which many financial advisers will know little or nothing about. Or you may want to consider joining Which? and subscribing to its Which? Money Helpline. That will cost you £10.75 a month.

If you have pension questions then the Pensions Advisory Service offers an excellent website and a helpful helpline on 0300 123 1047. The service is free and approved by the Government.

Specific advice about the pension freedoms which began in April 2015 can be found at the Government's Pension Wise website. If you are over 50 you can call 0300 330 1001 to book an appointment for one-to-one telephone advice, or a face-to-face interview at a nearby Citizen's Advice office.

These three services are now part of Money and Pensions Service or MAPS. It used to be called the Single Financial Guidance Body and I really wanted it to be renamed the 'I can't believe it's not advice' Agency. But the Government decided against that. At some point the three separate services may be combined under the MAPS banner.

Footnote
Only the term 'independent financial advice' is regulated. Anyone can call themselves a 'financial adviser', an 'investment manager', or a 'property specialist'. And they do. Those terms are meaningless. If an adviser does not use the word 'independent' or does not say simply say 'yes' when you ask if they are independent, then they are not. Avoid them. Always ask for a FCA number and check it out on the Financial Services Register. Sadly - and madly - the register does not say if the adviser is independent or restricted. Sadly - and madly - again, changes to the Register mean that it is not as reliable as it was. A replacement way of checking people will not be fully in place until 31 March 2021. But never trust someone who is not on it. And be cautious even about those who are.

If you are ever cold called or receive a text or email from an adviser you have not found and researched just say 'no'. No-one ever lost money by doing that. Many have lost money by not doing that.

Paul Lewis
13 January 2021
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Wednesday, 3 June 2020

SMART METERS - DO THEY THINK WE'RE DUMB?

UPDATED 3 June 2020

The latest figures indicate the Government is going to miss its revised target to fit 85% of home in Britain with a smart meter by the end of 2024.

This new target was introduced in September 2019 when it became clear that the original target of fitting or at least offering one to every home in Britain by the the end of 2020 was, literally, unachievable. But now the new one looks out of reach too.

By the first quarter of 2020 just over 19 million smart meters had been installed in homes, split about 57:43 between electricity and gas. The number of installations has fallen from its peak of 1.3 million in the last quarter of 2017 to just 984,685 in the first quarter of 2020. A year ago I said that at the current rate of fitting it would be be mid to late 2026 before the target was reached. That remains the case.

To install the remaining 25 million smart meters by the target date would require 1.3 million fitted every quarter. In 2019 the average was just over a million a quarter. The rate is falling - and will have been practically shut down by coronavirus - so even at a million it would take 25 quarters which takes us to the first few months of 2026.

The trade body energy UK warned the Government in November that the target was unreachable and the best it could hope for was just over two thirds of homes fitted by the end of 2024.

Meters fitted
Of the 19.2 million smart meters which had been fitted by the end of March 2020 only 4.3 million were SMETS2, leaving 14.9 million of the early version called SMETS1. Despite their name they are not smart enough to cope when the customer changes supplier and will normally go dumb or, to use the official phrase, 'operate in traditional mode'. The latest figures show that 3.7 million of these SMETS1 meters have gone dumb and BEIS has told me that "the vast majority is likely to be a result" of customers switching supplier.

So in addition to the 25 million traditional meters that need replacing another 15 million SMETS1 meters need upgrading.

Since 15 March 2019 all meters being fitted should be SMETS2. However, we know that some suppliers have still been fitting SMETS1 meters because SMETS2 are in short supply and they still have SMETS1 meters in their stores. The latest report for Quarter 1 2020 says "Energy suppliers are now installing second generation smart meters (SMETS2) as the default choice in most cases." My emphasis. It clearly implies some SMETS1 meters are still being installed.

There are plans to upgrade SMETS1 meters to operate with any supplier. They will still not be SMETS2 meters but the workaround will at least mean they can support switching supplier. This process is known as enrolment into the DCC network (described below) and it was due to begin in July 2019. The target date to upgrade all SMETS1 meters is still the end of 2020. It is not clear to me yet what progress has been made but we do know that 3.7m SMETS1 meters are still operating in dumb mode.

Voluntary
Customers are free to choose whether or not to have a smart meter fitted. But the large companies are more and more trying to make it seem inevitable. Some are even booking appointments without agreement others are cold-calling and sending texts to customers. This hyperactivity was because if they missed the original 31 December 2020 target they could be fined. EDF was fined £350,000 for missing its 'milestone target' for fitting meters. These milestone targets are secret and Ofgem refuses to reveal them despite an FOI request. Ofgem also confirmed that any SMETS1 meters fitted after 15 March 2019 will not count towards those milestone targets.

Most major suppliers now have at least one tariff where agreeing to a smart meter is part of the terms and conditions. Regulator Ofgem says such terms are within its rules as long as "communications are transparent and accurate, including around any smart meter only tariffs they are offering."

Not all homes can have smart meters. Rural areas, tall blocks of flats, buildings with thick walls, and meters in odd locations can all prevent installation. And the target by the end of 2024 is only to fit them to 85% of homes - leaving between four and five million homes without one.

What smart meters do
Smart meters are not in fact very clever. They simply report back to the supplier how much electricity and gas the customer uses each day and, with the customer's permission, every half hour. More frequent reporting may be available in future.

The meter also feeds some information about current use to what is called an 'In Home Display' or IHD. If you have both electricity and gas there will be one IHD which covers both electricity and gas. It will normally be mains-powered and fixed in position but there will be an option for a separate portable battery powered unit. The IHD can show how much fuel is currently being used and can display the cost in £.p. Some of them will have a traffic light system - glowing green when consumption is low through amber to red when it is high. They can also do calculations of past and future use. Some reports suggest that if the IHD is switched off for any reason it is difficult or impossible to get it back online and recording usage accurately.

Costs
The costs of the smart meter programme are certain, though it is inevitable now that they will increase above their current estimates. The latest cost/benefit analysis was published in September 2019. It is still priced in 2011 pounds and to get to a current 2020 cost these figures should be multiplied by 1.17. It estimates that manufacturing and installing 53 million meters, communication devices, and IHDs in 30 million premises will cost £7.5 billion. There is also a new communications infrastructure network called DCC which will cost £2.9bn. That was due to be completed late in 2015 but was in fact not switched on until November 2016 and was still being tested In 2018. It now seems to be working with the 4.3 million SMETS2 meters fitted by the end of March 2020. The cost/benefit analysis puts the total costs of the programme over 22 years at £13.5bn. That is around £15.8 billion in today's pounds.

That cost is more than £500 per household and is paid through higher electricity and gas bills. Those payments have begun. In 2017 all major suppliers and some smaller ones have put up the cost of electricity by 10% to 15% and each of them blames that rise in part on smart meters. That process continued in 2018.

Savings
Estimates of the savings are more speculative.

 * Customers will save money because they will use the information from the IHD to cut their energy consumption. That is the theory and the saving from that is put at £6.2bn over 22 years based on a 3% cut in electricity use and 2.2% in gas use (and just 0.5% for prepayment gas customers). The savings figure assumes that just one in three customers will achieve these savings.

Achieving those savings requires active engagement by customers. But many will not be engaged and will end up paying more. A report by the old Department for Energy and Climate Change on some pilot smart meter installations found that initially 96% used their IHD but about four out of ten disconnected them during the research. None were able to identify any clear savings due to the IHD. The Public Accounts Committee estimated in 2014 that customers would save on average about £26 a year. A survey by a price comparison site in July 2018 (on a small and perhaps not representative sample) found that less than half (49%) of its sample of 678 people with a smart meter had reduced energy usage. And as standing charges grow - in 2019 they accounted for 13.5% of the typical bill - the scope for reducing bills by cutting energy use decreases.

Customers will also gain, if they choose to, by faster switching from one supplier to another. The process can take weeks now but a 24 hour service is promised. They will also benefit from suppliers sending an accurate monthly bill of energy used rather than sending out estimated bills. Though they will then lose the advantage of smoothing their bills over the year. 

In the 2019 Cost benefit analysis there is a new saving allocated to customers. It is £1.4 billion from what it called 'time savings' which it says is a monetary value on "reduced time consumers spend interacting with the energy system". That includes reading the meter, sending the results to the supplier, calling the firm with complaints or questions and, in the case of prepayment customers, travelling to a shop to get their key charged up. It comes to 32 minutes per year for credit meter customers and around three hours per year for prepayment customers. Halve those times for customers who only have electricity.

* Energy suppliers will save an estimated £8.1 billion. The biggest chunk - £2.3bn - will be from ending meter reading and other home visits. Reduced customer enquiries and complaints will save £1.2bn. Another £1bn will be saved by managing pre-payment customers better and there is a big saving of £1.2bn from reducing the cost of customers switching supplier. A further £1.9bn is saved by managing debt better and reducing theft.

* Networks and the generators will save £1.7bn between them from smoothing the peaks and troughs of demand and generating less power.

* Finally, carbon related benefits and air quality improvements will add £2bn to bring total savings to £19.5bn, of which £9.8 billion is saved by the energy industry directly.

These figures from the 2019 cost/benefit analysis are in 2011 pounds. Actual costs in 2020 pounds will be 17% higher. Even in constant terms the total cost of £13.5 billion is £2.5 billion more than the 2016 assessment. The cost is being paid by energy customers through their bills.

Who gains?
Less than a third of the savings will be made directly by consumers, though if you add in the value of the time saved that comes to 39%. Half the savings will be made by the industry. The hope is, of course, that suppliers, generators, and transmitters of electricity and gas will pass some of those savings on. They may. But some of their savings - on debt management and prepayment meters for example - will come at a direct cost to the customers affected though they may be passed on to others.

So while the customers will pay for the £13.5 billion cost of the smart meter programme through their bills, the savings of £6.2 billion will only be gained by those who adjust their behaviour and and the £9.8 billion saved by the industry will only be felt by customers if the industry passes on its own savings to customers in lower prices. It is not at all clear that the £2 billion rather speculative carbon related and air quality savings will ever reach consumers' pockets.

The energy industry has a very poor record in passing on savings. In 2014 they took many months to pass any of the gains from the fall in the wholesale price of gas and none reduced electricity prices even though much of that is generated by burning gas.

Extra costs.
The impact assessment does not take account of two significant extra costs.

First, bills will no longer be estimated as they will be based on actual usage over a month. That is promoted by the Government as good news for consumers. But it will be expensive for gas and electricity suppliers. For many years they have encouraged customers to agree to pay estimated bills monthly by direct debit rather than quarterly based on meter readings. The result is that the firms have kept hundreds of millions of pounds on their books belonging to customers. The value of that is shown by the fact that customers who pay a more accurate quarterly bill can be charged 7% extra or more more than monthly direct debit customers. If they no longer make that saving then prices will inevitably rise. Some customers may prefer to keep estimated bills. They are at least constant and that can help with budgeting.

This money the suppliers routinely hang onto is separate from the £400m that Ofgem found they had wrongly kept when customers switched to another supplier. In February 2014 it ordered firms to refund this money. That event does not bode well for hopes that the industry would voluntarily return to customers the savings it makes from smart meters.

Second, the DCC has incurred expenses planning and eventually implementing the upgrade of SMETS1 meters. The National Audit office estimated in November 2018 that will add another half a billion pounds to the cost.

Time of use
The report also makes no assessment of the costs or savings to be made from what are called Time of Use tariffs. Once the smart meter network is rolled out suppliers will start making customers manage the load, especially in electricity supply. In other words when demand is high the price goes up. When demand is low the price comes down. And with half hour reporting - and it may be more frequent in future - time of use tariffs could be very specific.

For example, energy could be more expensive between 7am and 9am when most people are getting up, putting on the kettle, and making breakfast. Or between 5pm and 8pm when evening meals are being cooked. The result would be that poorer families could not afford to eat dinner at dinner time.

Ultimately the cost of power could rise during the adverts in TV soaps or the interval in football matches when millions put the kettle on make a cup of tea.

Time of use tariffs mean that the customer is being drafted in to manage the national power load. By pricing people out of energy use at peak times the peaks and troughs of usage - so irksome to the engineers managing the grid - are smoothed out.

Time of use tariffs are particularly being touted for charging electric vehicles overnight for those drivers who have a drive or garage at home where they can charge them up. The current specification for home vehicle chargers specifies that suppliers will be able to decide the time of day that the energy is fed to them.

Debt and disconnection
Smart meters will also enable energy suppliers to manage debt and disconnection remotely. Customers can be switched from credit payment to prepayment by the supplier without changing the meter. It also means that if someone has not paid their bill then the supplier will be able to disconnect them remotely. There are currently safeguards about who can be disconnected and when. But once the conditions are met the process of doing so will be much simpler. In fact though there were only 17 disconnections in 2017.

Organisation
The delivery of this programme is in the hands of the six large and dozens of smaller energy suppliers. They each fit the meters for their own customers. Which could mean dozens of different engineers visiting the same street or block of flats to do the same job in neighbouring homes.

The central Data & Communication Company (DCC) is run by Capita. It will be responsible for collecting the data sent back by smart meters and forwarding it to the right energy supplier, the networks and energy services companies. Others may also get access to it. In 2014 the Information Commissioner expressed concerns about the security and use of this data. There is currently no provision to let customers know specifically who has access to it.

The data network will be run by two companies - Arqiva will cover northern England and Scotland using a long-range radio network and Telefonica UK will cover the rest of England and Wales using standard cellular telephone technology with what it calls 'mesh technology' to fill the gaps in the cellular network. Unlike individual customers the devices will be able to roam between suppliers to find the strongest signal. The target is to cover 99.25% of dwellings - which if achieved will leave 225,000 premises unconnected. However, remote dwellings, tall buildings, and multi-occupied premises are problems that have not been solved. Some in the industry have said that 30% of homes cannot be integrated into the DCC grid. The Department for Business, Energy, and Industrial Strategy has not denied that figure.

Meanwhile Smart Energy GB spent £87m over 2018 and 2019 to persuade us all that the smart meter programme is a good thing. What it calls building consumer awareness and understanding of smart meters and encouraging consumer engagement. It included advertising such as the Gas and Leccy characters and a Smarter Britain bus tour with daytime TV housing gurus Kirstie Allsopp and Phil Spencer - who admitted he didn't have a smart meter before he was paid to promote them.

In November 2018 the Advertising Standards Authority told SmartEnergyGB to stop claiming smart meters were free as we were all paying for them - about £400 per household - through higher bills. And in March 2019 it ruled that a claim smart meters saved people money was false and should be withdrawn. They only save money if we change our habits to use less.

Criticisms
On 25 November 2018 the National Audit Office published a report on smart meters and warned


"The facts are that the programme is late, the costs are escalating, and in 2017 the cost of installing smart meters was 50% higher than the Department assumed. 7.1 million extra SMETS1 meters have been rolled out because the Department wanted to speed up the programme. The Department knows that a large proportion of SMETS1 meters currently lose smart functionality after a switch in electricity supplier and there is real doubt about whether SMETS1 will ever provide the same functionality as SMETS2. The full functionality of the system is also dependent on the development of technology that is not yet developed.
The facts summarised above, and many more, are not fatal to the viability and value for money of the programme. However, there are serious issues that need to be addressed if Smart Meters is to progress successfully and deliver value for money."

On 15 October 2018 a revised House of Commons Library briefing set out the difficult task of meeting the 31 December 2020 deadline and has a lot of useful background information.

In July 2018 the British Infrastructure Group of MPs and Peers published their report Not So Smart which said that the saving per household would probably be only £11 a year and that the 2020 deadline was not achievable - it recommended a two year extension. It also raised concerns about whether the savings by the energy suppliers and the networks would be passed on to consumers. It was concerned that customers would not know what was happening to their data.

On 7 March 2015 the Energy and Climate Change Select Committee expressed concerns about delays and unresolved challenges in the smart meter programme. "Without significant and immediate changes to the present policy, the programme runs the risk of falling far short of expectations. At worst it could prove to be a costly failure."

In December 2014 the Ontario auditor general Bonnie Lysyk said that the state's smart meter programme had cost twice its estimate and made few if any savings for customers or suppliers and failed to reduce energy consumption.

3 June 2020
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