As someone invited to sit on the Financial Advice Market Review (FAMR) Expert Panel, I have personally been surprised by early reaction to the publication by HM Treasury of the Final Report on 14 March.
Firstly, it’s worth clarifying that the Expert Panel was not responsible for the final report. The Panel met on six occasions, with a number of supporting one-to-one telephone conversations. Our agenda was based on the original call for input, and we focused our discussion on addressing the high-level themes relating to advice demand and supply, inhibitors and other market issues as set out in the initial paper.
At the end of the process we submitted a summary of our discussions and recommendations for potential areas of regulatory and legislative focus which was considered, along with all the other responses to the call for input. The final report has been penned jointly by HM Treasury and FCA representatives, having taken into consideration the views of the Expert Panel, and those of the other 268 respondents to the call for input.
The solutions considered in the final report have been broadly categorised into:
- Affordability,
- Accessibility, and
- Liabilities and consumer redress
However, I think that before criticising any of the potential solutions mentioned we do well to remember that the whole point of FAMR was to consider how to stimulate a market which can deliver affordable and accessible financial advice and guidance to everyone, at all stages of their lives.
I was personally frustrated to hear persistent mention of “consumers who won’t pay up front fees”. Casual yet repeated reference to typical advice charges of £150 per hour are also “unfortunate” to say the least.
Why?
Firstly, the assertion that “clients won’t pay up front fees” is largely untested, and in my own experience (mirroring findings relating to retirement advice) highly dependent on the framing of the alternatives.
If the advice community has done itself a disservice, it has gone so far down the path of educating consumers about post-RDR charging structures, removal of commission, introduction of fees and, on occasions, detailing some incredibly complex menus of costs and services, that the consumer has become terrified of seeking advice.
In my own advice practice, many clients did in fact pay up-front fees, with (in those days) products implemented on nil commission terms. Paying for a second opinion, separating advice from any need to implement a product, or paying for advice on subjects where product sales were a complete irrelevance were all good reasons why some clients chose to pay fees, but even then it was not up front, but after the event, having received the advice and assessed its quality and value as far as was ever possible.
Secondly, the vast majority of clients simply do not have to pay “up-front fees”. The costs of advice can be facilitated through products recommended and implemented. Money does not change hands in a way that should discourage people from seeking advice. Of course I am not saying that advice is free, but it certainly does not require chequebooks or credit cards, and certainly not in advance of receiving advice.
If the advice community has done itself a disservice, it has gone so far down the path of educating consumers about post-RDR charging structures, removal of commission, introduction of fees and, on occasions, detailing some incredibly complex menus of costs and services, that the consumer has become terrified of seeking advice.
I know that this has occurred because most adviser firms and product providers say that a very small percentage of adviser charge agreements are settled by way of a fee, rather than a facilitated adviser charge.
What’s more, any adviser knows that the total time required to complete even a quite basic recommendation is more than the 3.3 hours implied by an hourly rate of £150 and a total average advice cost of £500.
Additionally, many advisers give advice pro bono, or simply at a loss-leading rate. Advisers provide advice below cost, instead taking a long term view of the lifetime value of the individual client or their family or business connections. A number of advisers only charge their fees if products are actually implemented, charging nothing if clients do not proceed or if the advice requires no new product sale, an assertion supported by the FCA’s concern about potential bias in contingent fee-charging models.
My final observation is that a number of advisers have over the years moved away from providing protection advice. Advisers turning their back on this stalwart of good holistic client advice seems inappropriate and illogical.
And now, with FAMR in mind, the commission that advisers can receive in respect of non-investment protection policy sales provides an ideal way to cover, or offset, the costs of advice, especially for the majority of clients whose financial needs typically involve life assurance or family income benefit for personal cover, decreasing protection, possibly incorporating critical illness benefits, to cover the mortgage, and income protection.
Re-broking cover to reduce premiums and / or enhance benefits is also a valuable client service, and commission generated from new or re-brokered sales can offset the costs of retail investment advice, typically on pensions or individual savings accounts.
The only requirement was that commissions received were disclosed and that the client was clear how commission was being used to meet adviser charges, frankly one of the least complicated parts of the advice process.
Many advisers seemed to take the ban on cross-subsidies between elements of the total product and advice delivery chain in vertically integrated businesses to mean that they could no longer use income received from other business lines to cover the costs of client advice.
If advisers could consider income generated from non-investment protection business, personal or commercial insurances, or mortgage advice as part of the overall “client account” and then facilitate any balance of advice costs owing, then accessibility and affordability are dramatically improved.
Yes, the regulator does have much to do to revolutionise the financial advice market. Government has its own significant part to play, as do product providers and other market participants. But advisers who want to make a difference could do so.
Helping consumers understand that good quality professional financial advice is available and affordable right now would be a good start.
Gillian Cardy has asked to make it clear that in this article she is expressing her personal views and not those of either the Panel or Defaqto.
