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We need a helping hand more than ever but many OF US can’t afford the fees of financial advisers. Will the free Money Advice Service guide us to a better place? Iona talks to the chairman about plans for specialised online advice for young people – and wonders whether the current website is steering us in the right direction
We know that when it comes to money, young people need all the help they can get.
They have always faced a specific set of financial difficulties, whether it is getting on the property ladder or getting enough rounds in without breaking the bank.
But this generation has, to paraphrase Harold Macmillan, never had it so bad. Take, for instance, the first-time buyer predicament, one I likened to a classic Catch 22 scenario a few weeks back. A new confirmation of this comes from a survey carried out by YouGov for the Chartered Institute of Housing.
High housing costs and increasing utility bills mean many are struggling to make ends meet, with individuals renting in London left with as little as 25% of their net income after housing costs. The survey also discovered that renting your own home can be between 83% and 100% as expensive as repayments on a mortgage for an equivalent property, leaving little room to save for a deposit.
If that isn’t an impossible situation to be in, I don’t know what is.
But these kinds of statistics are finally galvanising young people into action. It certainly inspired me to do something – I set up this blog to offer some guidance, or at the very least solidarity, to all the young people trying to find a way out of this mess.
But it is little wonder that young people are also turning to their nearest and dearest in this time of need. Earlier this month, Halifax Savings suggested that supposedly rebellious youngsters are happy to consult loved ones about money. Their research showed 32 per cent of 18 to 24 year olds look to family and friends for advice, whilst more than half would confer with a partner on small financial decisions.
But outside your family and friends, getting advice can be a risky business. Banks, life insurers, building societies and fund managers can guide you towards certain financial products, but many in the industry work on lucrative commission and customers can be led to make decisions that aren’t necessarily in their best interest. The recent PPI mis-selling scandal showed people were paying for insurance they didn’t even know about as an extension of other products bought with banks and building societies. Many didn’t need PPI or weren’t even eligible for it in the first place. This is one reason why the Financial Services Authority (FSA) have been goaded into reviewing the way we get financial advice, making sure it is always clear and appropriate to our circumstances.
To avoid becoming the victim of a snake oil salesman, you best bet is supposedly a financial adviser, especially an independent one that isn’t restricted to selling you the products of just one company, like a tied adviser, or the products of a limited range of companies, like a multi-tied adviser. But this is a costly route; these IFAs currently charge fees or a commission, though the latter option will be scrapped by the FSA in 2013. And young people are not exactly beating a path to their doors. According to the International Longevity Centre, our generation cannot afford the fees and are more likely to turn to the internet rather than the “cold and overly-bureaucratic” face-to-face advice on offer, they said.
But I heard about a service that could offer free, unbiased money advice for young people in the next year.
What’s more, the service offers an online assessment that can give you some basic financial pointers in less than ten minutes.
Does it sound too good to be true? It is an extension of the Money Advice Service, which has certainly come in for criticism since its launch this month. The government-backed service aims to give millions of people free and quick financial advice via an online “health check”. People are invited to outline their general financial circumstances, and a sophisticated algorithm will produce a series of suggestions, such as opening an ISA.
But since the service is unregulated, customers cannot claim compensation from anyone if the advice on the website turns out to be wrong. The chance of that happening (and we are talking about a quick, general assessment from a machine here) is not out of the question. Doesn’t it undermine the whole idea that quality financial advice is worth paying for?
I had the opportunity to talk to Gerard Lemos, the chairman of the Money Advice Service, last week. He told me about that a health check that will be specially designed for young people could be online in the next year.
“It will be directed at 16-25 year olds because the key financial decisions in your life are taken by the time you are in your mid-twenties – you will need the advice more than ever.”
One criticism I had was that student debt is not taken into consideration on the current web health check. The Young Persons version will remedy that. “It will be a lot more specific and personalised than the service available at the moment. We want to start a viral campaign ahead of the website launch and we’ve already begun work in schools.”
But only regulated financial advisors can offer advice – surely it should be called the Money Guidance Service?
“Our market research showed that people responded significantly better to the word “advice” rather than “guidance”. When 23 million people in the UK don’t know where to turn when they have money issues, the service needs to be a highly recognisable brand to reach out to them if they don’t have the fees for an IFA.”
He says the new online health check can identify the top three things people can do to make the most of their money. In other words, the site wants to help those with “reasonably straightforward financial worries.” And, presumably, give them reasonably straightforward solutions.
But when I entered some details into the current service, I received some rather drastic advice. I was told, first and foremost, to think about my pension. The details I entered were for an average young person – neither mega-rich nor a street urchin – who needed a bit of guidance on how to proceed. The apparently obvious tip – start putting some savings away – was at the bottom of the list.
Nope, the advice was simple. Before you think about anything else, get thee to a private pension scheme, if you aren’t in a final salary or defined contribution system with an employer. Aged 23
Make no mistake: we are in the midst of a pensions crisis. It is a hugely complex issue that I will return to in the future – it can’t be described in 140 characters or less, Twitter-style.
But it is one thing being in a pension scheme with your employer and quite another to figure out the byzantine world of pensions on your own when you are barely out of short trousers. Surely young people have to ultra-careful when making any kind of long-term plan with private pension schemes?
Mr Lemos insists this advice wouldn’t be given to all young people but defends the pensions dictat. “We do want to make young people change their behaviour and plan for the future more; we absolutely want to put long-term thoughts into their heads.”
Easier said than done. For many young people, “long-term thoughts” constitutes a decision on what beer garden to visit this weekend if the weather bucks up. And, more seriously, they are also concerned about how they should pay off their student debt, whether their current income can cover their living costs or how on earth they are going to save for a deposit on their first home.
When I got burgled a few months back, I had my piggy bank stolen. It contained savings I had earned from music gigs. By the way, lesson number one in personal finance – not a good idea to keep savings in an animal-shaped pot that could be easily nicked.
But my mum offered to replace it with a Terramundi pot, which you have to smash if you want to get any money you’ve put in. Most young people I know are loathe to buy one of these. They cost around £15 and they’d hate to destroy it if they needed to get a bit of extra cash. At least I could get my money from Mr Piggy via a little hole at the bottom. And the Terramundi still offers no protection from thieving mitts.
So if you are another young person who couldn’t commit to a £15 Terramundi pot, think extremely carefully before you sign up to any private pension scheme.
I don’t want to be flippant. In principal, who wouldn’t approve of a free and easy “health-check” for those who need help with money? But we shall have to wait and see what kind of advice will be issued when the service launches in the next year.
Meanwhile, there are many websites that offer financial information; you’re reading one right now. Only the Citizens Advice Bureau can offer face-to-face advice for free but well worth turning to if you need to talk.