24th February 2025

Balancing Price and Value in Financial Advice

The ongoing tension between price and value often leaves consumers worse off, even when they seek professional financial advice.  Recently, Tom Baigrie and I, representing the PDG, met with the Financial Ombudsman Service to discuss the delicate trade-off between cost and value. While this may seem like a technical debate, the implications run deep, influencing how compliance managers and networks set and enforce their rules. Several key issues emerged from our discussion, and this article explores some of them.

The Challenge of Optional Child Cover

In recent years, insurers have introduced optional children’s critical illness cover, allowing those without children to avoid paying for a benefit they cannot use. While this flexibility makes sense, it has created challenges for advisers.

Some compliance managers prohibit the addition of optional child cover to policies for clients who do not yet have children, citing it as ‘future insurance.’ Consider the scenario of a young couple securing a life and critical illness plan for their new mortgage. If they plan to start a family in a few years, their adviser may be unable to include child cover due to network restrictions. As a result, they must rely on the couple remembering to add this cover once they have a child. However, the most comprehensive plans cover children from birth, including congenital conditions, pregnancy complications, and stillbirth. By enforcing a rigid ‘no future insurance’ policy, compliance managers may inadvertently compromise Consumer Duty principles, where the ultimate goal is to ensure the best outcome for clients.

The Issue of Life Cover Without Dependents

Another concern relates to critical illness cover (CIC) plans that include life insurance for individuals without current dependents. Many compliance managers reject such applications, despite the reality that most young people will eventually have dependents. Waiting until dependents arrive introduces the risk of uninsurability. Additionally, many insurers include life insurance at no extra cost, and for those that do charge, the increase is minimal. Blocking this option ignores long-term client needs and may lead to financial vulnerability later in life.

Level Term Plans for Capital and Repayment Mortgages

A further contentious issue is the recommendation of a level-term plan to cover a capital and repayment mortgage. Some advisers prefer this approach, believing it provides a financial cushion and accounts for potential future borrowing. However, many compliance officers take a restrictive stance, dismissing this strategy despite its potential long-term benefits.

The Portfolio Approach in Protection Planning

Compliance restrictions can also hinder a more strategic approach to financial planning. Just as no prudent investor would place all their funds into a single asset, a portfolio approach to protection insurance can offer broader coverage. For example, instead of a single £400,000 policy, an adviser might recommend four comprehensive £100,000 plans. This structure can significantly enhance child cover and additional payment benefits without necessarily increasing costs. Yet, some compliance teams view this approach with scepticism.

The Ombudsman’s Perspective

Ultimately, the reluctance of compliance officers stems from the fear that the Financial Ombudsman Service will rule in favour of complainants. Tom and I posed a critical question to the Ombudsman: does their assessment place excessive emphasis on cost at the expense of value?

Their response was reassuring. While they do not set legal precedents and evaluate each case on its individual merits, they emphasised that a well-documented suitability letter is crucial. Such a letter should clearly outline the rationale for the product recommendation and confirm that, after discussion, the client has agreed to a potentially higher-cost but more beneficial option. Importantly, it should conclude by inviting the client to raise any concerns or misunderstandings immediately.

Conclusion

A rigid approach to compliance can sometimes undermine the very purpose of financial advice - ensuring the best outcomes for clients. By fostering a more nuanced understanding of price versus value, and by documenting decisions effectively, advisers can navigate these challenges while still delivering robust, client-focused solutions.

Alan Lakey, CI Expert

Protection