Financial advisers have never had it so good. The collapse of the DB market has led to the outflow of tens of billions of pounds into the wealth market, the emergence of fund platforms has allowed them to demonstrate a professionalism that would have been unthinkable at the turn of the century. IFAs have not just survived RDR, they have thrived in their new found status as the financial managers of the mass-affluent.
But the mass-affluent is a relatively small part of the UK population, the vast majority of us, never hire an IFA and rely for our advice on what we can get from the papers and increasingly from websites. Many ordinary people still rely on the workplace to organise their retirement savings, and while the numbers accruing defined benefits has fallen through the floor, the numbers saving to create a big pot in later life has rocketed. 10m new savers will have joined the estimated 13m existing DC savers, by 2020. In practice, all but the self-employed, unemployed and those consciously opting-out – will be in some form of workplace pension.
The financial adviser’s role in the accumulation of retirement savings has diminished with auto-enrolment. Their primary function, prior to RDR, was to encourage saving through the implementation, management and promotion of GPPs. With the banning of commission, this is no longer a productive line of business. Instead IFAs have turned their considerable endeavour to the management of the wealth created by this saving.
But the numbers of IFAs has fallen. This chart shows how numbers fell as RDR was implemented.
A recent FOI from Paul Lewis suggests that there are only around 26,000 IFAs operating in Britain today, less than one for every thousand of the people saving into workplace pensions.
It is both unreasonable and unfeasible of us to expect that IFAs will be able to cover the entire population of people wishing to spend their retirement savings.
The need for collective solutions
Only one IFA I know, regards his work as focussing on the mass market of medium to low earners, that IFA- Gareth Morgan (the Ferret) – is the exception that proves the rule!
Who looks after the retirement finances of those beyond the reach of this limited numbers of IFAs? The answer to that question has yet to be addressed because it is tomorrow’s problem.
But tomorrow’s problem needs a solution today. We cannot expect the Chancellor to pull a second white rabbit out of his 2025 budget and suddenly event a solution for the mass – unadvised! We need to plan now.
To me, the creation of collective DC plans is no more than an adaption of what we already have (DC workplace pensions) to meet this future need.
And let’s be in no doubt, the need will be from people who cannot afford and could not benefit from individual wealth management.
Collective Defined Contribution schemes are designed to provide a non-advised solution to people’s everyday problem of converting a pot or money into a wage for life. This has been described by one economist as the hardest, nastiest problem in finance, I would not deliver it to my brother or girlfriend, but we are currently planning to deliver it to the vast majority of those in workplace pensions.
It is quite clear from work done by among others, Aon, State Street, People’s Pension and First Actuarial , that most people, given the choice, would like their pension savings to provide them with a wage for life (aka a pension). That 89.1% of the CWU membership that voted on what they wanted , voted for a wage for life (rather than a pension pot- should come as no surprise. They represent the 90% of us who don’t want to be advised, but want things to happen for them.
In previous incarnations, these people were paid a scheme pension from a DB plan, had an annuity thrust upon them or simply didn’t save.
Collectives deal with the 90% who the IFA neither want nor have capacity to advise
I am not saying that collectives will not present IFAs with a challenge, They will do in the next decade, what stakeholder pensions and then NEST did in the last decade, they will reform the savings market,
In case anyone has any doubt how much that market needs reforming, then I will be publishing over the coming months a series of studies on the inefficiencies of our current system, which is delivering shocking value for money in some areas.
IFA charges will come under scrutiny in the short term, not because of CDC, but because the FCA’s platform review, their thematic work on DB transfers and the ongoing work arising out of the Asset Management Market Review and CMA investigation , will shine a light on best and worst practice.
I have no doubt that in the short term these investigations will show a wide difference between good and bad, but they will not show ordinary people another way of doing things.
Only the development of a new kind of product can do that. The delivery of CDC, first through the Royal Mail and subsequently through the upgrade of occupational DC (including multi-employer schemes) and finally the general purpose “aggregator” CDC schemes, will provide a new benchmark for wealth management.
I look forward to a time when IFAs will be able to clearly demonstrate their value, relative to the value of a CDC and win that argument. I have no doubt they will do, again and again – just as they did with stakeholder, with NEST and with the RDR. CDC is a challenge to the IFA business model, which the IFAs will win.
But that business model is for the 10% of the market that can be deemed mass affluent, not the 90% who can’t!