The aim of the Financial Advice Market Review is to make advice cheaper, clearer and better for investors. But what issues does the UK Government need to address if it is to achieve these goals?
Republished with permission from the Chartered Institute for Securities and Investment (CISI).
In August last year, the UK Government announced a Financial Advice Market Review (FAMR) into how financial advice could work better for consumers. In October, together with the Financial Conduct Authority (FCA), the Government began a three-month public consultation, and plans to publish a final report before the Budget in 2016.
The FAMR follows the introduction in April of pension freedoms, which give people with defined contribution pensions the option of taking out all the money from their pension pot in one go. “A key part of that is making sure that people can access high quality, affordable, tailored advice and guidance to help them make informed financial decisions, whether that is saving for their first home, taking out a mortgage, buying a car or saving and investing for the future,” said Harriett Baldwin, Economic Secretary to the Treasury.
Tracey McDermott, acting CEO at the FCA, reinforced why such a review was needed. “The financial decisions people make can have long reaching effects,” she said. “It is important that the market provides accessible and affordable advice when people need it.”
The FAMR will analyse:
- The size and cause of a ‘gap’ in financial advice for people who do not have significant wealth or income and who want financial advice, but may not be able to afford it.
- Regulatory or other barriers firms face in giving financial advice, and how to overcome them.
- Opportunities and challenges presented by new and emerging technologies to provide good value, efficient and user-friendly financial advice.
- How to encourage a ‘healthy demand’ for financial advice, including dealing with issues that deter consumers from seeking it.
It will be carried out by an expert advisory panel led by Nick Prettejohn, Chairman of Scottish Widows Group, and comprising 12–15 senior figures representing financial services providers, financial advisers and consumer representatives.
The Government is also reviewing how free and impartial financial guidance (including the Money Advice Service and Pension Wise) can be made more effective.
The UK’s regulatory authorities have already shaken up the nation’s financial advice market this decade.
Regulation changed at the start of 2013, when the FCA’s Retail Distribution Review rules came into effect. Advisers were told to charge customers a fee rather than take a commission from the financial provider they picked for their customer. The rule change was intended to end the incentive for financial advisers to encourage customers to invest in products paying the highest commission. The result was that many banks stopped offering financial advice.
Obtaining financial advice from those firms that do still offer it does not come cheap. According to a survey by unbiased.co.uk, an online marketplace for financial advice mentioned in the FCA/Treasury consultation, consumers are paying an average hourly rate of £150 for professional, regulated advice.
Some consumers, the FCA adds, may also find it hard to judge the value of advice because the benefits are usually deferred over time and more intangible than for purchases of non-financial products.
It begs the question: if millions of people cannot afford financial advice, is it possible to offer everyone affordable advice? Not unless the Government cuts the cost of regulatory compliance for financial services providers and financial advisers, warn some experts.
Richard Freeman, CEO of Intrinsic Financial Services and a member of the FAMR expert advisory panel, says: “The primary issue is the cost of advice. Financial planning is typically a business of thin profit margins and these are put under ever-increasing strain by the cost of regulation and compliance.”
Advice is a tightly controlled profession for good reasons, of course. But certain changes, such as cutting unnecessary, lengthy disclosure documents for regulators and clarifying the fees that the regulator and the Financial Services Compensation Scheme will charge back to the industry, would benefit both customers and the financial adviser profession, Freeman adds.
“As with any industry, if the cost of compliance becomes a hindrance to innovation and growth, the net outcome will be decreased competition and less choice for the consumer,” says Freeman. He adds that improving the “economics of advice”, so that advisers do not have to either raise fees or reduce the level of service they provide in order to absorb compliance costs, will help ensure customers receive a better service.
Making tax rules on investments simpler and improving training for financial advisers would also help consumers get better value.
Bridging the gap
One of the main questions that will confront the FAMR’s expert advisory panel is: why are people not getting financial advice when they need it?
The Citizens Advice Bureau says that there are four main gaps in financial advice, including “affordable advice”. It has estimated that an extra 5.4 million people would consider paying for advice if it cost less, while there is a “free advice” gap of about 14.5 million people who think they would benefit from free advice, but haven’t sought any in the past two years.
“To be a success, the FAMR must establish the full extent and cause of the advice gaps,” says Gillian Guy, CEO of independent charity Citizens Advice and a member of the review’s expert advisory panel. “Affordability is the gap that is commonly debated, and the price of financial products and services does have a part to play. But it is also important that consumers know what types of support are available, can access them as and when they need them, and can move or be referred easily between different types of service.”
But making financial advice cheaper may not necessarily mean that more people take it up. The number of professional financial advisers declined from about 26,000 in 2011 to 24,000 in 2014, according to the FCA.
Why the decline? The increased cost of regulation may be one reason, but not the only one. Other possible reasons include technological developments, such as the availability of online support tools and information for decision-making and purchasing financial products. People feeling more confident making their own decisions, and a lack of trust from consumers in professional advisers could be two more reasons, according to the FCA.
Of course, regaining the public’s trust can prove difficult, as banks have found. But Informed Choice’s Bamford believes that the profession needs to raise its game. He says: “We need to put an end to misselling scandals involving unregulated investments or greedy tax planning schemes, as these are hugely damaging to our profession and costly to the end consumer, who inevitably ends up paying compensation costs through the cost of advice.”
It is not just customers that need help – advisers need protecting too
Increasing both the quantity and quality of financial advisers would also benefit customers, suggests Martin Bamford, Chartered Financial Planner and Managing Director at Informed Choice, an independent financial adviser. “The advice gap could be closed by investing more in the recruitment and training of financial advisers, especially with supporting roles such as paraplanners, for which a new apprenticeship standard was recently launched.” Paraplanners support advisers in many ways, in particular with the production of suitability reports.
It is not just customers that need help – advisers need protecting too. The Association of Professional Financial Advisers has said that it wants the FAMR to have a “fundamental rethink” of regulation of financial advice, particularly advisers being subject to unlimited liability – compensation claims from customers for bad advice.
But ultimately, will the review help investors get better advice? At the very least, it should give them more choice, says Freeman. “Advisers specialise in helping clients understand investment risk and recommending investment portfolios suited to individual personal circumstances. This can’t be provided through investment plans that don’t provide advice, and the review could give more investors access to an investment plan built specifically for them.”
So there is much for the Government, the FCA and the external advisory panel to ponder as they undertake the FAMR. They know that getting financial advice right is particularly important in light of the new pension freedoms.
Leaving it Late
When it comes to planning for retirement, a joint survey conducted by unbiased.co.uk and MetLife has highlighted some significant differences between those who take financial advice and those who do not. The survey, 2015 Value of Advice, found:
*The average age for seeking advice on retirement is 35.
*Advisers recommend seeking financial advice 40 years before retirement.
*38% of UK adults are currently not saving anything for retirement.
*People are seeking retirement advice ten years too late on average.
*The average amount that adults are saving towards their retirement each month is £97, but those who took professional financial advice are saving an additional £71 per month.
*People who have taken advice expect to have to fund a retirement lasting 37 years on average, whereas those who have not taken advice think they will be retired for just 22 years on average – a belief that may leave them dangerously underfunded.
In the meantime, the financial services industry should hope that consumers only speak to regulated financial advisers that can be verified through a check of the FCA’s Financial Services Register – and that they contact the regulator’s consumer helpline if unsure. The last thing the industry needs is another misselling story hitting the national headlines before the review is complete.
To find out more about financial guidance currently offered by the UK Government, go to the Money Advice Service website at moneyadviceservice.org.uk and the Pension Wise website at pensionwise.gov.uk