A new tool could open the door to wider use of simplified advice models by removing the risk of complaints down the line and accrediting clients that have sufficient knowledge to purchase products through a limited guidance-based process, FTAdviser can reveal.
Software firm Suitable Strategies, which is separately working with The Pensions Advisory Services on a suitability tool for its telephone service, is looking to develop a free ‘capability passport’ that consumers can use to access simplified advice from a variety of providers.
The passport would be able to be used with either advice firms or product providers offering simplified models and could counter the common claim that firms will avoid offering stripped down services for fear of facing complaints several years later.
Last month, Ascentric’s Hugo Thorman warned simplified advice will not be backed by firms or widely offered across the industry because the regulator has made clear there is “no such thing as simplified” with suitability and complaints would lead to fines “down the road”.
Neil Bage, director at Suitable Strategies, told FTAdviser that advisers could direct remote customers to the tool in order to help replicate the “whites of the eyes” conversation that they would usually carry out face to face.
Once a customer passed the tool’s three-minute long test, they would be able to use the certificate to streamline the advice process or purchase less complicated investments directly.
Suitable Strategies is in the process of signing contracts with a larger technology provider to help build scale into the system, before taking the service to networks and platforms to build the partnerships that would enable it to be provided free to clients.
The Financial Conduct Authority has been especially keen to promote simplified advice and has promised movement on ‘mass market’ models in the face of criticism from MPs over the so-called advice gap.
The firm took its first step towards ubiquity of the idea last month, as The Pensions Advisory Service began to trial the ‘Bambooing’ online financial capability tool with users of its helpline.
The tool measures an individual’s risk aptitude, alongside their understanding of key financial terms and level of engagement. In Tpas’ case, the assessments will allow the service to tailor its retirement guidance offer to client circumstances.
Mr Bage explained: “It will allow providers to develop a fuller picture of people’s financial personality and compare them to the population as a whole – a ‘matrix’ approach to products – where financial capability assessments help advisers and providers match certain market segments with suitable product types.”
He went on to explain that using research conducted with City University, the Bambooing tool also helps understand the impact of cognitive bias, framing, loss aversion and the use of heuristics when making financial decisions.
“This reduces the risk of mis-selling, assists providers and advisers conform with regulation and helps serve customers more effectively.”
Mr Bage pointed out that the upcoming pensions freedoms will emphasise the need to assess financial capability, as more choice necessitate a greater level of understanding.
Suitable Strategies’s commissioned Mintel to carry out research last year which found that 37 per cent of the UK population did not understand how an annuity works, while 13 per cent have never even heard of them.
The knowledge gap is especially wide amongst the most vulnerable consumer segments, according to Mr Bage, citing the survey of 1,916 UK adults.
Even for the most widely understood concept of inflation, only 40 per cent of the population felt that they had a good understanding.
A fifth of people had never heard of mutual funds, a third did not recognise annual management charge and the majority of the population did not know what the total expense ratio was.
peter.walker@ft.com
