‘Advice firms appear to face little competitive pressure to innovate and offer new, more affordable services, or to try to attract less wealthy consumers. Competition does not appear to be operating effectively in the interests of consumers.’
If you were to draw one conclusion from the FCA’s long awaited review of the Review of Retail Distribution it is that the fundamental issues around competition are as intractable as they were when the darned thing was implemented in 2012. The problem is as much about the purchasing of advice as about its selling and right at the bottom of this is a concern that people do not think they should have to pay to be told how to behave.
Long on problems
There are signs that more people are taking advice with the percentage of UK adults increasing from 6 to 8% in the past three years and there are just under 2000 more financial advisers today than there were in 2017. But advice remains a “minority sport” practiced by the wealthy in pursuit of wealth preservation. For the majority of people, financial advice seems to be a commodity with a price cap of £250, putting it in the same price bracket as the subsidized cost of medical prescriptions, dentistry and of rather less importance than the cost of watching the TV. Advisers may moan that “consumers may know the price of everything but the value of nothing” but time is usually a determinator of change and not much is changing over time.
The review found that advice is being paid for out of the pot of wealth accumulated by the saver, no savings- no advice. The system of indemnified commissions did at least reward the adviser for getting people saving but the introduction of auto-enrolment has rendered that role redundant and with it the back end charges on products designed more to reward advisers than savers. The review’s findings that small pots aren’t warranting advice points to the overwhelming fiscal advantages of “adviser charging” which allows advisers to avoid charging VAT and typically allows advice to be paid out of tax-incentivized savings.
Perhaps the most disappointing section of the report was its review of what is happening in other countries. There seems little evidence that there is any voluntary uptake in the purchasing of advice in any of the countries examined by the FCA. Indeed, markets such as Australia and the USA, in the past held up as paragons, are exposed as offering bad value from opaque charging structures.
The report finds that there is now greater awareness of automated investment services that link people’s stated preferences to fund and asset allocation solutions. People are more aware of Nutmeg, Tickr and others but they are not using them for financial advice. When asked how much of their pot they would pay a robot for management, the consensus was £140 a year.
By contrast, the review held up Martin Lewis as the nation’s financial adviser, someone who people relate to on a human level and who’s advice is seen to be delivered free and to the concerns of ordinary people.
Short on answers
If financial advice were to become as much a part of our daily lives as visiting the dentist, it would have happened by now. It hasn’t and there is no sign that it will. Good advisers do not need to prospect for new business, there is plenty of demand for good advice, poor advisers need to pay lead generators for custom and unsurprisingly the cost of lead generation is reflected in the value for money offered by poor advisers.
If the RDR and its sibling the Financial Advice Market Review have been worthwhile, it has been in ridding the market – for the most part of poor advice, allowing good advisers to prosper and creating reliable standards for those who seek advice out. But on the flipside, it has found no key to unlock advice for the mass market (not even Martin Lewis whose service is limited to the concerns of ordinary people.
Which begs the question, are ordinary people really expecting to take decisions on matters such as how to manage their retirement savings so that they last as long as they do. The findings of the review were that most people had not come to terms with the tools of the job. 70% of those questioned by the FCA had not heard of UFPLS, 40% did not recognise the risk that income from drawdown could go down over time.
In short, the review finds that the intractable issues in 2012 remain the intractable issues of today. There are no silver bullets from regulating financial advice unless they are in preventing poor advice from doing harm. We have an advisory industry that thrives on wealth and on sorting out the complexities of the tax system, pension freedoms and the bloated choice of a fund management industry.
So long as fund managers, platforms and life companies continue to consider financial advisers their primary distributors, the current state of affairs will continue. The alternative is not proving to be automated advice but automatic enrolment and the delivery of default solutions through collective agreements with employers.
The solutions that work for the mass market are those that limit choice to opt-outs , rather than explode choice through “freedoms”. Key initiatives such as the implementation of standards such as “value for money”, work where collective arrangements are in place, meanwhile the regulation of financial guidance as a regulated activity (as exemplified by Martin Lewis) seem the best way of influencing behavior to the better.
The FCA’s review is short on answers and long on problems. Perhaps we are due a paradigm shift in our perception of financial education. Perhaps we have been too optimistic in believing we can wake Britain up to money.
Simply select an adviser who charges by the hour and not a percentage of your worth.
There is no silver bullet, as you say. One thing that is missing is the will on the part of the consumer to save and invest and seek help to do it. (How many people invested their PPI windfall, I wonder?) Even when it is provided free, the uptake of financial help is low, as the research for the report shows:
• 3% of all UK adults recall using Pension Wise – an increase on the 2% reported in 2017 (to set this in context, it should be noted that only consumers aged 50+ with DC pensions are eligible for Pensions Wise guidance)
• 3% remember using TPAS – no significant change since 2017
• 8% recall having used other government or consumer websites or service such as Money Advice Service, Citizens Advice, the Money Advice and Pensions Service (MAPS), or GOV.UK
So, it is not just about the price, or even the availability. (But let’s not pretend that individualised face to face advice from a professionally qualified person will ever be cheap.)
A key difference between the UK and the USA seems to be in consumer attitudes to investing. A much larger percentage of households in the USA have investments (excluding 401K savings) than in the UK. One question is, why is that?
I think most people really do not need the kind of advice offered by regulated financial planners and never will do. The kind of professional detailed meticulously researched advice offered to the wealthy is worthy of the fees charged for those with existing wealth. But it would be a sledgehammer to crack a nut for the vast majority of the public with limited resources. The problem is that there are no real alternatives. It’s either full advice or nothing. Regulation by the FCA makes it too hard for the regulated advice community to offer a watered down form of advice. The regulator makes it a clear and present danger for a more limited advice proposition to be offered because there is a certainty that the advisers would be judged by the regulator as though they were offering full advice. Maybe we should not see the lack of desire to take advice as a surprise. If people have limited means and a limited perception of the benefits of saving then obviously they won’t spend money on being told how to spend what they do have. Where we live in a borrow and spend society, where there is a constant message to have things now and pay for them later, why would we expect people to behave in a way that leads to long term savings? Maybe as a society we are lost when governments use focus groups to find out what people will find acceptable before they produce policies. There is no leadership any more.