Should young people ever pay for financial advice?

20 September 2019

It often seems as if only wealthy or older people can benefit from financial advice, but is this the case?

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Strictly speaking, financial advice isn’t what happens when you have a conversation about mortgage deposits over a cup of tea with your mum and dad, but is in fact a form of government-regulated help given by professionally chartered, independent financial advisers (IFAs).

Such IFAs will help you to make financial decisions, recommend financial products and investments, and also advise on matters relating to tax.

Before you get advice

The alternative, non-regulated, version of this is called ‘guidance’. Guidance is often offered by charities and government organisations and is likely to be generic information that can help ‘guide’ you in financial decision making.

Kay Ingram, director of public policy at financial advice firm LEBC Group, explains: “For many young people the cost of advice is seen as a barrier to obtaining it. Guidance, rather than advice, can provide a good starting point. Guidance and education make consumers better informed before they make financial decisions.

“Guidance does not tell someone what they should do, but what they could do.”

Guidance can be a useful starting point for obtaining broader information on a financial area that someone needs help on. But there are drawbacks. Because it is not regulated by the government, if you use information that somehow leads you to losing money, then you cannot use organisations such as the Financial Ombudsman Service for redress and compensation.

A good starting point for financial guidance is the Money and Pensions Service (MAPS) – previously known as the Money Advice Service. Go to Moneyadviceservice.org.uk, and you can find an array of information and tools – ranging from debt help to managing your pensions.

When do young people need financial advice?

For older people who have accrued a lifetime of wealth and financial assets, such as property, pensions and other savings, financial advice is often necessary to help plan and manage them.

But as most young people don’t have such assets, the need for advice is less clear cut. However, there are number of life events that might mean a young person needs financial advice.

The most common time is when buying a home and using a mortgage broker, who offer a limited form of advice on a specific financial product. Another is looking at long-term retirement planning using pensions.

Less common but also relevant is receiving an inheritance – be it a lump sum of cash or property. It is conceivable that someone would need advice on how best to manage such a windfall, and even to understand the tax implications.

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But not all people in their 20s and 30s will find themselves in this situation. If a young person is simply looking to save more and invest, some are sceptical whether advice is worth the cost.

Myron Jobson, personal finance campaigner at interactive investor (Moneywise’s parent company), is one such sceptic.

“Everyone’s circumstances are different, but the average UK young adult should think very carefully before taking the plunge and going for fully-fledged financial advice – beyond applying for a mortgage – for a very simple reason: their financial needs are unlikely to be complex enough to warrant it,” he says.

“When it comes to investments, the modest amounts young adults typically seek to invest often don’t justify the cost for financial advice. Put simply, the fees for such advice would exert a drag on the performance of investments.”

But there is one other key life event that calls for financial advice: starting a family.

Becky O’Connor, personal finance specialist at insurance company Royal London, thinks the complexity of two people’s financial situations can create difficulties in making financial decisions.

“An important time to consider some sort of financial advice or planning for young people is when you start a family.

“For those in their late 20s and early 30s who are thinking about kids, having an idea of the difference children make to both income and outgoings is really important. An adviser can help people to think that bit further ahead.”

Where to go for advice

It is easy to assume that obtaining financial advice is beyond the means of most young people, who lack the capital some advisers would expect. But such firms are not the only source of advice.

In the breach, so-called robo-advisers have stepped in. Until recently, most have been geared solely towards investing, and the set of questions they pose up front are designed to filter out those people for whom investing would be inappropriate, such as people with significant (non-mortgage) debts.

But this is changing. Nutmeg, perhaps the best-known UK robo-adviser, now offers one-off financial adviser consultations and a report for £350. Others, such as financial advice app OpenMoney, offer a more holistic approach.

Anthony Morrow, chief executive of OpenMoney, explains why: “It’s often thought that financial advice means advice on how to invest large sums of money. And while this might have been true in the past, it shouldn’t be in the future. I believe financial advice should cover everything, from how best to pay off debts, how to manage household finances and how to save for the future.

“I am a firm believer in making financial advice accessible to all, and even more so when it comes to younger people. Instilling good financial habits as soon as you have any cash to manage will help to shape relationships with money for the rest of your life. Having this support could help reduce debts and help people save more for the future.”

Other apps, such as Moneybox, have become popular with young people, as the firm is one of the few to offer and encourage the use of the Lifetime Isa, which can be used to save for a home deposit or for retirement, and gives a 25% government bonus.

Another little-known source of free advice for young people is through their employer. Employers can arrange for their workers to receive £500 worth of advice a year, which is a non-taxable benefit for employees.

Kate Smith, head of pensions at retirement and workplace savings specialist Aegon, says this makes advice accessible and more affordable as the tax relief given to employees reduces the cost. 

“This tax break, which allows employers to give staff £500 a year towards pension advice and general financial and tax issues relating to pensions without creating an income tax liability, is really useful. But a high proportion of employers aren’t aware of it or don’t use it. And because employers don’t use it, employees also aren’t aware of it,” she explains.

“It’s a shame because this £500 benefit could be sufficient to get young people on the right track with maximising their workplace pension. Employers have a responsibility to encourage employees to engage with their workplace pensions and access to advice forms part of this.”

The best thing you can do to access this free advice is to speak to your employer or HR department about whether they have the service set up, and if not, to encourage them to do so. Unfortunately, at the moment employers are not obliged to provide the benefit even if you request it.

Ms Ingram, whose firm is also launching an advice app called Hummingbird, says: “The future of financial engagement of the younger generation will include online chatrooms and AI-led tools to help them learn about the building blocks of a sound financial plan.

“This can be supplemented by interaction with human advisers to help prioritise competing goals, understand how to maximise their chances of achieving those goals, through appropriate investments and tax wrappers.

“This combination of AI [artificial intelligence] and human input is what we call bionic advice and enables access to advice and guidance at an affordable cost. Giving nudges and updates can help keep them abreast of changes, which may impact their financial future.”  

Talk to an adviser

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Lucy Mowatt is a 34-year-old marketing professional from Norfolk and sought advice to plan for her and her fiancés’ future.

“Last year, at the age of 33, I decided that the time was right to quit my steady day job and set up my own content marketing business in Norwich. Thankfully, things have been going so well that my fiancé and I have decided that the time is right to buy a house together.

“However, because my business is still in its infancy – and because we separately own two properties – we decided to speak to a financial adviser. We didn’t want to fall in love with a house, only to discover that I couldn’t get a mortgage.

“I booked an appointment with an adviser whom I’ve used before, because he has given me sound advice in the past. We wanted to know how much we could borrow, how much repayments might be and what we would have to do to get there. We also wanted to know whether we could release equity from the properties we already own and what that would look like.

“We spoke for more than an hour and asked all sorts of questions, so we now have a clearer picture of our options. At least one provider will lend to me right now, but the entire market will open up to us next April, when I have a second tax return under my belt.

“The adviser also explained how much deposit we need to reach our upper limit; how much we need to put aside for stamp duty; and how to make the payments manageable.”

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