Serious Money

October 1, 2010 7:24 pm

Online debt advice that won’t leave you bankrupt

Debt management companies, civil enforcement officers, turf accountants, and hedge fund managers. Not so much professional services, as contradictions in terms.

All claim to be socially useful but, when you think about it, they just leave you a lot worse off (did you see the hedge-fund performance fee numbers in Merryn’s column?). Fortunately, as an FT reader, you’re statistically less likely to have dealings with the first on the list – and the other three are relatively easy to avoid (helpfully, the second lot look uncannily like traffic wardens, as that’s what they were once called).

So this week’s news that the Office of Fair Trading (OFT) is threatening to shut down so-called “debt managers” may have passed you by. However, it has wider implications for financial advice – and, arguably, those fund managers’ fees.

On Tuesday, the OFT told 129 debt management firms that they will be stripped of their consumer credit licences if they cannot prove that they have stopped using misleading advertising, referring to their advice as “free”, failing to disclose their fees, and employing incompetent staff. These are the people who claim to “solve” debt problems by charging borrowers huge fees for debt management plans, bankruptcies and individual voluntary arrangements – even though better advice is available free of charge from debt charities and Citizens Advice Bureaux. Even credit arbitrage hedge fund managers don’t seek to profit from this kind of distressed debt (yet).

But debt advice companies do it as a matter of course. Consumer website lovemoney.com points out that 148 companies were investigated in the OFT’s review – so 87 per cent of them were so bad as to have been put on notice of closure.

As a result, Payplan – a creditor-funded service that does not impose fees on customers – has joined with the Institute of Money Advisers and AdviceUK to lobby the Ministry of Justice for a statutory regime for the debt management industry. They already have the support of a group of cross-bench MPs.

But is the problem a lack of regulation, competition, or education?

At the recent Consumer Credit Counselling Symposium in Cambridge (think David Lodge’s Small World but with more social policy wonks and fewer shenanigans), experts seemed reluctant to recommend too much regulation for fear of distorting competition. Apparently, the Ministry of Justice has concluded that competition is essential. But debt advice – like sub-contracted parking control, betting and hedge fund management – is evidently one of those sectors where competition doesn’t deliver a better outcome. It simply results in more people losing out.

Regulation to cap – or ban – fees for setting up certain debt plans would at least drive out some of the dishonest profiteers. But is it expecting too much for education to help people identify the most cost-effective sources of advice?

Not necessarily. If borrowers and savers can be directed to a free, independent source of advice early enough, the results are considerably better. This week, debt charity the Consumer Credit Counselling Service (CCCS) reported record numbers of clients repaying debt through its zero-cost debt management plans – a 12 per cent increase on last year, and in line with the Bank of England’s latest consumer credit figures, which show the largest drop in total debt in nine months.

Tellingly, those using the CCCS service also have access to another free online service called CCCS Money Matters (not to be confused with our blog of the same name) which, through a series of anonymous web questionnaires, works out the most appropriate steps people can take to improve their overall financial position – not just in terms of debt, but income, assets and financial products.

Now, this free online advice model has been developed further by Optimize.com, a new US service. It claims to be the first website to allow investors to submit their current fund holdings – and instantly receive details of funds and exchange-traded funds that have achieved better performance, at lower risk, with lower charges. Optimize says it is able to identify fee savings of up to 80 per cent. But it does not require users to buy any funds via the Optimize site – leaving them free to use the cheapest broker they wish. Its business model is based on low costs and online advertising revenues.

“Our main objective at Optimize.com is to expose and eliminate all unnecessary investing fees for individual investors,” says founder Matthew McGrath. “We are ignoring the lucrative trail fees and other commissions.”

If borrowers and savers in the UK could be provided with free online guidance services such as these, we might only have traffic wardens and bookies to avoid.

matthew.vincent@ft.com

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