Kim has hit on the central difference between the FCA’s new consumer duty and previous attempts to provide an umbrella strategy that guides the behaviour of product providers and advisers.
Can we all get behind a principle that puts the customer first – nice principle, unlikely to work in practice unless we are clear what customers actually want. So let’s consider what the public wants from financial advice. W
Wealthy people want to manage their wealth to be managed to their needs. Take this as an extreme example.
Spending this afternoon helping a colleague collate 20x application forms for a client investing £2m, purely in high street deposit accounts.
(because it’s not all about all the product).
— Not Elon Musk (@Cunningham_UK) November 18, 2022
Some people feel happy knowing they have absolutely locked down their wealth and this client has decided that the FSCS £80k per pot protection is part of the strategy. This is exactly what advisers should be doing. It is not just Paul Lewis who has worked out that the security of cash is worth sacrificing prospects of growth (or even inflation protection).
If you have £2m in liquid assets, these kind of choices are available to you. Sadly most of us need to make our money work as hard as we do, which means making sure it meets our needs. There are two tools in the adviser’s toolbox to make this happen
- Cashflow modelling (aka financial planning)
- Wealth management (aka investment advice)
The ever astute Heather Hopkins is as helpful as Kim Gubler here
The vast majority of financial advisers focus too much on portfolio performance and fail to evidence to clients the value of their advice, a new study suggests.
In an adviser survey on the impact of the Consumer Duty, wealth consultancy NextWealth says that advisers are too focused on investment performance.
NextWealth surveyed more than 400 financial advisers in the summer about how they document their value to clients. Some 73% said they used clients’ portfolio performance as their main measure.
The next most column evidence sent to clients to prove value was milestones against client goals and objectives, reported by just under half of advisers.
Heather Hopkins, managing director of NextWealth, said: “Relying on performance data to evidence value is incredibly risky, particularly when markets are so volatile. Not only does it put too much emphasis on market conditions, it fails to measure the planning and emotional support that clients value most from working with a financial adviser.”
So why is financial planning de-prioritised?
I think the answer is simple. Clients value financial advice but are not prepared to pay for it as a standalone service, Clients are prepared to pay for financial advice when it is part of a package that includes investment management.
But financial advice is hugely more labour intensive than the implemented advice delivered through a wealth management solution.
In practice, most advisers make their margin from the bps added to the AMC and the business model tells them that the more revenue generated from the repeat income of funds under advice (as opposed to invoices for ad-hoc advice) the better the margin and the buy-out value of the practice.
So it’s hardly surprising that most advisers would like to be considered wealth managers rather than financial planners and see their consumer duty accordingly.
And advisers are right.
So long as consumers are happy with paying 2% pa + on their wealth , then the current model works. There would need to be considerable downward pressure from the likes of Vanguard to bring adviser fees down and we know very well, from client feedback to SJP and others, that advisers are fulfilling their consumer duty charging these prices (just as Al Cunningham is – getting his client’s money secured behind FSCS).
The issue is a capacity one, there is plenty of custom for the advisers and not enough custom for the advisers. Unless there is a seriously better way of managing long-term money than that offered by advisers, the current situation will continue to prevail (at least for those with money to burn).
But competition is weak
The problem facing the consumer is that while the likes of Vanguard offer a cheap non-advised alternative (including investment pathways), people will still want the human touch mentioned by Heather Hopkins and many others. The human touch is unaffordable for most of us, because we will not pay invoices and we don’t have the funds to meet the wealth manager’s minimum targets for “funds under advice”.
The last thing that advisers should do (other than out of charity), is take on clients with small amounts of funds and a high dependency on advice for financial planning.
To return to Heather Hopkins though
“Relying on performance data to evidence value is incredibly risky, particularly when markets are so volatile. Not only does it put too much emphasis on market conditions, it fails to measure the planning and emotional support that clients value most from working with a financial adviser.”
The Consumer Duty may yet change the balance.
Wealth management encourages laziness and the market economics do not challenge that laziness, advisers are right to put their feet up and be lazy if that’s what their customers allow them to do.
But if the duty to the customers (the consumers) is now subject to more scrutiny from the FCA, if innovation starts undermining habitual laziness and if consumers start voting with their feed to find better ways to plan for their financial future, then lazy advisers will have to work harder and do more financial planning.
Kim and Heather may never have heard of each other, but they are kindred spirits who are coming at Consumer Duty from radically different places. That they think as one , suggests that there is more to this Duty, than bland platitudes.