When you’re sick, you go to see a doctor. They usually provide a medical diagnosis and a resulting course of action. It’s the same for legal situations, where you go see your lawyer or notary.
But who do you consult when you have a big financial decision to take? Who should we trust?
Financial education is not the answer
Contrary to what is often claimed, making a major financial decision is not limited to selecting a financial product; it often requires professional help. It is more about developing a financial strategy, combining different types of measures or products together, assessing the impact of the decisions in the long run, and not forgetting the tax implications of the decisions.
While the wealthiest households have access to wealth management services, middle-class must fend for themselves. Or worse, they contact so-called ‘financial advisers’ working directly or indirectly (intermediaries) for the financial industry. These advisers are salespeople who receive incentives for recommending specific products. No prize for guessing these products are not the safest in town or the best-suited to the consumer’s situation.
The result is that public authorities, flanked by the financial industry, consider financial education to be the panacea for people with financial decisions. Unfortunately for them, too many studies show that financial education by itself has never helped consumers take better decisions.
So what would help?
Households cannot afford to make the wrong financial decisions. Long-term commitments (e.g. pension funding) and large amounts (mortgage loans) have a huge impact which can only be seen in the medium or long term, sometimes too late or too costly to be reversible. A wrong decision can be detrimental for somebody’s financial health and lead to over-indebtedness or insufficient funds at retirement time.
For all these reasons, a group of consumer experts, the Financial Services User Group, looked into what would really help consumers make better financial decisions.
First off, they think it’s essential that people can access expert, independent help to set up a proper financial plan for their future. This covers looking at the person’s goals, priorities and resources and understanding what sort of risk they want to take. Some of this help would take the form of ‘save more’, ‘consider cutting the family budget’ or ‘repay your loans first.’ It may involve a step-by-step process.
Put simply, it wouldn’t involve the recommendation of any specific financial product.
Some concrete examples of financial guidance that would benefit consumers:
- Regular financial check-up. In the same way that in some countries, all persons covered by social insurance can benefit from a health check-up for the purpose of prevention, any household should have access to a financial health check-up. This could help raise awareness on the need to act, to detect major omissions or errors, make adjustments or strengthen consumers in their decisions;
- Developing a financial plan to achieve a particular goal on medium or long term: course of action that may be combined with recommendations of some categories of products;
- Response to a specific and immediate need: buying a home, investing an inheritance or a pension pot;
Providing adequate information and tools to consumers in order to help them access to reliable financial advice for consumers who have no time or do not want to shop around to find the best deal, such as a list of reliable brokers, comparative websites, ‘robo’ advisers and where to find model portfolios that match their profile and are built by trusted and independent organisations.
How would this be different from what already exists? Put simply, it wouldn’t involve the recommendation of any specific financial product. That is why we would call this service ‘guidance’, as opposed to the ‘advice’ that banks or financial intermediaries provide, which is often detrimental to consumers.
When you’re sick, you go to see a doctor. But who do you consult when you have a big financial decision to take?
Then comes the question of who would provide this guidance. While many financial services firms claim to provide this to their customers, only two bodies have been identified as fully providing this service: the German consumer association (VZBV) and a service set up by the British public authorities (Money Advice Service). We need more of these kinds of services across Europe.
Who would pay for it?
The part of national budgets that may be spent on financial education should instead be allocated to the provision of financial guidance. It would be more useful there. Fines for financial service firms which do not respect consumer rights could also be ring-fenced for use in the development of a financial guidance network.
Consumer groups or public bodies could be the providers. There could be tax benefits for users, incentivising the take-up of these services. The benefits for society could be huge in the long term.
People who use financial services will recognise this as their reality: it can be downright complicated and time-consuming to know what’s good for you. It’s the same for health. But then again, that’s why we have doctors.
We’re co-hosting a seminar on the theme of financial guidance on Tuesday 13 June. More here.