What happens if you take the “regulated” out of financial advice?


Talk to most people in ‘regulated’  financial services and they’ll tell you that for them, auto-enrolment hasn’t really taken off. If you pick beneath the skin, this means that it hasn’t yielded the expected returns in the 2013-15 business plans.

Ask why the disappointing revenues and you will get a general response that “the customers didn’t turn up”. For those who run traditional advisory businesses, whether they be actuarial consultancies of one man IFAs, the small employers are not – as they were expected to- arriving at the door , with wallets open.

This is coming as a rude shock to many for whom regulated status has created a near monopoly on pensions advice. It prompts a further question “if not from us -from whom?”.

The first lesson that the financial services is learning from auto-enrolment is that consumer purchasing cannot be predicted on the basis of past performance.

Much has been made of the reutilisation of financial services with institutional purchasers, typically large employers, walking away from defined benefit schemes and even group risk in favour of flexible benefits and DC plans.

What hasn’t been so appreciated is that the majority of their staff, who had been expected to be the new wave of clients , have shown a marked reluctance to paying the fees that advisers now need to charge for pure advice. The last survey I read suggested that fee tolerance is creeping up , but it still suggested that £241 was the ceiling (on average) that people would pay for the strategic advice that we call “financial planning”.

This reluctance to pay fees is mirrored in the way small businesses are approaching the purchasing of workplace pensions for their staff. There being no budget for advice on pensions and there being no obligation on employers to pay for advice, the vast majority are avoiding taking any form of advice on what is right for their staff.

The harsh reality for advisers is that small employers do not regard their services valuable, either as pension advisers or as surrogate compliance officers. The issues to do with compliance are payroll issues and sit more naturally with their accountants and their payroll bureaux while pension choice is neatly dealt with by the availability of NEST at no seeming cost.

Put aside the niceties of whether NEST’s “self sufficiency” support package is indeed free to use, the perception is that the take on and management of a workplace pension is free to the employer. The advisory industry has only itself to blame for this perception as it has – for decades- perpetuated this myth. The cost of advising on and setting up a workplace pension was high but was recovered from commissions paid by employees through member borne charges.

The financial services industry is learning that creating a market for fee paid advice is a lot harder than it could possibly have imagined. It means competing with accountants, payroll and the pension providers who previously were their support. In this new and competitive world, financial advisers are ill-equipped to compete.

But perhaps the hardest lesson for regulated advisers, is that they can no longer rely on their regulated status as a means to get work. Just as you don’t have to be an accountant to run a payroll, you don’t need to be an IFA to manage a pension . With advice on pensions unregulated, it is possible for the payroll operative to step up to the plate and become the expert. Indeed many payroll operatives are now creating panels of workplace pensions that pay no regard to member outcomes and focus entirely on how cheap and easy the workplace pension is to implement and manage.

In this regulatory vacuum, we are already seeing major issues emerging.

It’s estimated that a minimum of 180,00 people (DWP figures) have or will be auto enrolled into pensions which can offer no tax relief. This is probably a gross underestimate as a high proportion of the ultra- low- waged have earnings spikes that enrol them for a pay period and (save for clever use of postponement) keep them “in”.

The combination of unregulated products and unregulated advice is making the regulated  financial adviser’s role redundant

The plethora of master trusts with white labelled variants is clearly unsustainable. The first breath of Regulatory wind (probably the enforcement of the master trust assurance framework) will lead to many falling over, or at least closing to new business. We have yet to see how consolidation will work but it looks an expensive and clunky process.

The combination of unregulated products and unregulated advice is making the regulated  financial adviser’s role redundant. Regulatory compliance, so long the unique selling point of the IFA, has little intrinsic value in this anarchic world.

The emergence of a new customer base, their lack of competitiveness and the loss of regulatory protection make regulated advisers an unaffordable luxury to most small businesses who regard auto-enrolment as an unwanted cost not an employee benefit.

To turn that equation around and make a workplace pension a part of an employer’s DNA is going to be a big ask for regulated advisers.

With easy pickings arising from the liberalisation of the in-retirement market , it is a whole lot easier to become a wealth manager than a workplace pension consultant. There is little comfort for advisers in the prospect of being able to advise employees individually.

The advice gap created by the abolition of commissions makes the prospect of advising low -paid employees in small companies no more enticing than low-paid employees in large companies. It is true that in establishing a relationship with the owners and senior managers of these employers, new prospects are emerging, but these new prospects are savvier than to entrust their finances because they owe them a favour.

In practice, the owners and managers of most small businesses are entrepreneurs who are used to managing their own finances as they manage their own businesses. There is no crock of gold at the end of the auto-enrolment rainbow.

If I am painting an unacceptably negative picture for regulated advisers who have baked auto-enrolment into their 2013-15 business plans, then I make no apology. Now is the time when the 2015-18 plans should be finalised and regulated advisers cannot avoid the admission of a further 1.8m employers into a pool of prospects for workplace pensions.

But faced with the same old issue of prospecting for new business and new issues to do with getting paid and adding perceived value, should auto-enrolment be a must-have in the IFA’s strategy?

The obvious answer is that unless an IFA can find a new way to engage, educate and empower an employer to take on and manage a workplace pension , there is no way he or she can add value. The Financial Advice and Market Review talks of new ways, especially in the provision of advice and guidance through new technologies.

While guided pathways and gamification have taken over retail decision in everything from choosing your spouse (Tinder to Dateplay) to choosing your culture (Amazon to Netflix), we have yet to find a way to choose our financial services in as authoritative a way.

That said , for Lord Sugar ,Vana Koutsomitis’s on-line promise was trumped by Joseph Valente’s promise to deliver service in the bathroom.

For IFAs who want to play in this new market,  adopting the ways of the world looks essential. Transferring the skill set that has been created within a regulated practice and delivering them in an unregulated but litigious world is a challenge that few IFAs have even recognised.

But it is the challenge awaiting them as we approach the second half of the auto-enrolment revolution.


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11 years providing financial advice to individuals directly and through employers. 14 years within insurers working with advisers to provide better DC and DB outcomes. 25 years left to make a difference!

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