The Money Advice Service has been consulting over the past few months on what a Directory of IFAs might look like. This consultation was spurred by the imminent launch of the Guidance Guarantee which will generate requests for financial advice.
The point of the Directory is to present people with sources of advice suitable to their needs. So it will be a “dating agency” filtering advisers by location, delivery options, (f2f, web and telephone) and any exclusions that advisers might impose to ensure that the customer is right for them.
We now know that, contrary to the stated intent of the procurement process, MAS will be building and managing the Directory themselves. This may be disappointing to organisations (such as ourselves) who pitched for the work, but it is perfectly reasonable for MAS to adopt this approach, provided MAS recognises the responsibilities it is taking on.
My first worry relates to MAS’ independence.
The database MAS will be using will not be Unbiased’s or VouchedFor’s or PICA’s or any other trade association. MAS will get its feeds directly from the FCA. This is absolutely right and it is what First Actuarial called upon MAS when they requested us for proposals. By using data feeds from the FCA’s directory, MAS are remaining independent of all trade associations, any accusation of bias or complain about exclusions vanishes since the FCA are the ultimate arbiter.
But by being the managers of the Directory, MAS becomes the gate-keeper and since MAS is paid for by a levy on advisers, we need to worry about conflicts. By including an adviser on the Directory, MAS and by extension the FCA are endorsing that advisor. There is no longer anyone else in the process acting as quality control.
So we need to feel absolutely confident that the experience for those seeking to buy advice – many of whom will be first time buyers- will be a good one.
My second worry relates to the “exclusions” being applied by Advisers.
At two recent events I have attended, the Corporate Adviser Summit and the Investment Network’s October meeting, advisors have told me that they intend to exclude not by “minimum fee” but by “minimum funds”. This sets alarm bells ringing!
If you want to see for yourself, just how prevalent this practice is – go to http://www.vouchedfor.co.uk/ and search for advisers near you. I suspect that few will want to advise you if you have less than £100k of wealth.
If I go to a lawyer or an accountant I expect to be presented with a set of time/cost rates. I might get an indicative quote for the work to be done, if I was lucky I might get the job quoted at a fixed price.
So what is the relevance of the funds I have at my disposal? If I have no funds to manage, can I not get advice?
The inference is that the fees I will be paying for my advice will be based on the funds I have to be managed. But I am not going to an adviser to get my funds managed, I am going for advice as to how I should financially organise my retirement. This involves me thinking about how much I will have to work, how I should plan for extreme old age, what I should be doing about my property, inheritance, the advisability of buying extra state pension and when I should be doing all this.
The question of who and how I should have my DC monies managed may fall out of this conversation, but it should not be the primary conversation.
The impression I get from talking to advisers is that the major decision – the point of advisory sessions – is to find an alternative to an annuity. The alternative to be promoted will be the Advisor’s proprietary solution which is likely to involve a basis point charge over the assets under management. This is what is now called “vertically integrated advice” which is a posh term for commission.
And so long as this is the primary focus of the Advisor, all other options are likely to be discounted. So the woman with a reduced entitlement to the new state pension, or the person close to state retirement age may not be recommended the option to buy more pension rights because of this bias. When new non-advised products arrive as part of the DA agenda, they too may get ignored. Even annuities, which may be the most suitable choice, are in danger of getting forgotten such is the allure of “funds under advice”.
The obvious alternative is to ask people what initial fee they are prepared to pay for their advice,
My third worry relates to the customers of this advice.
There is a real danger that advice will continue to be advertised as “free” and that advisors will depend for remuneration from a charge on the assets under advice. Unless the nominal amount being taken out of the funds is properly advertised, people will continue to discount the basis point charge and forget that it is every bit as expensive as paying the advisor by cheque. 1% of £100,000 is a thousand pounds. But is not just £1000 in 2015, it is £1000 in 2016 and for as long as the £100,000 remains.
Here there are two further problems, firstly a conflict between the adviser and his client as to the spending of the money –the more spent, the less the adviser earns in future, secondly an inbuilt bias for the advisor to be inattentive in future years. We have ample evidence of how the commission system gamed against the customer. Commission- based advisers were better off letting sleeping customers lie (as they got paid for doing nothing).
The new customers that MAS will provide may not be sophisticated and may not understand that by entering into a contract where the adviser takes a charge on assets for advice just what this means. This advice is not free and if advisors free-load on advisory assets in future, it will be picked up. The financial press are watching and the cavalier practices of the past will be quickly exposed. Customers who claim to be fooled into advisory agreements are now well informed on their rights and will have the full-force of the consumerists behind them if they can prove they are not being treated fairly
My final worry is for MAS itself.
By taking on the management of the Directory, it is putting itself directly in the firing line for any criticism of the advice given. It is therefore doubly conflicted. On the one hand it is to act as a gate-keeper protecting consumers against bad practice and on the other hand as promoter of advisers who are paying its fees. Can any organisation act as an independent interface when it has such skin in the game?
And now three questions.
Can MAS can be smart and outsource the quality control to the customer?
If MAS are smart, they will follow up on the second of our suggestions to them. They will ensure that they receive feedback on the experience of using the advisory from the customer. When the dataset is big enough to be meaningful (for instance when five reviews of an advisor have been received, MAS have got to be tough enough to publish the consensus view of that advice – ideally by means of a star-rating. This blog will be subject to such rating and over time will get the rating it deserves. I see no reason why the same should not be the case for advisors.
Indeed over time, a composite rating which judged the advisory experience holistically might even be broken down into the individual measures by which advisors could be judged. What those measures should be is a matter for further debate which we need to have.
Will MAS be bold and promote feedback from day one?
It is important that the Directory that MAS builds – is enabled not just to issue feedback forms but to collect the feedback scores and start the rating process. The publishing of scores may have to wait a few months, maybe a year, but Advisors and Customers need to be aware that this feedback will be used in evidence.
Absolutely critical to any feedback is to capture whether customers understand what they are paying for and what they are paying. Since this is the point at which the financial services industry has fallen down in the past, this must be the point that MAS shows it is serious.
If MAS acts as the guardian of transparent charging then the rest can fall into place. I have no doubt that advisers, who have clear rules to work by, will work within those rules. It must be made clear that the Directory is here to promote financial advice and not as a means to collect funds under advice. Where advisers are seen not to be advising, but simply selling their proprietary product, this must be reflected in an Advisor’s rating. MAS must have the ability to share this feedback with the FCA and Advisor’s must be aware that their behaviour is being monitored in a very real way.
Can MAS pull it off and redeem itself?
I think this is the acid test for MAS. If they are to be the managers of the Directory, they must accept they are both the consumer and advisory champions. There is no reason why they cannot do this but they will have to significantly raise their game to pull this off. There is no doubt that MAS is held in low-esteem within Government and among Advisors, MAS cannot duck this perception. The Directory gives it a seat in the last-chance saloon. How it manages the Directory will determine whether it is turning itself around or whether it continues to be an expensive unloved quango.
Having given MAS free consultancy on this matter, and having seen MAS adopt the main thrust of our proposal to them, I think they are in turnaround mode. Indeed, by taking back the Directory- the management of which they intended to outsource, they are stepping up to the plate. They have rolled the dice and doubled the odds, success should be praised, but failure will be damning