OpinionAug 20 2015

Betting the FAMR: Let’s tackle the cause of the gap

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Betting the FAMR: Let’s tackle the cause of the gap
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That the Red Cross is a force for good is pretty much universally accepted as a fact.

Its staff selflessly place themselves in positions of extreme danger to provide help to whoever needs it, irrespective of their religion, nationality or which ‘side’ they belong to. Nobody would question the organisation’s exalted status. Except actually, as I recently discovered, some would.

Many members of the US army hate the Red Cross with a passion. Not because it gets in the way of their wounding and maiming, but rather the gripe goes back to some 70-year-old doughnuts.

During the second world war, the Red Cross ran a series of comfort stations for soldiers, offering coffee and doughnuts. This carried an obvious cost, so UK servicemen were met with a small charge for the doughnuts, but US GIs enjoyed them for free.

Tommy, with some justification, argued that this aberration went against his sense of fair play and, sure enough, following an intervention from the US secretary of state, keen to defuse any potential tension between the Allies, the Red Cross decided it should charge the Americans for their doughnuts too.

Uproar ensued. Eventually the doughnuts were made free to everyone and equity was achieved. But it was too late. Not only did it end up having to channel funds into the provision of pastries, the Red Cross had also blown it with the US troops.

Since then it has made huge efforts at reconciliation, turning up at veterans’ events with truckloads of free doughnuts in an attempt to win back favour. But to this day, generations later, US soldiers are still likely to wrinkle their noses in disdain at the very mention of the humanitarian organisation.

It may be a sign that I have been doing this job too long, but the first thing that story made me think of was the Retail Distribution Review. Before the brand new dawn that the RDR brought, there were many individuals who didn’t realise that the provision of ‘free’ advice was not viable. While that was not even three years ago, rather than 70, we are also still dealing with the fallout.

Despite the best intentions of the erstwhile regulator, the FSA, the upshot of the new regime is not that those individuals have suddenly proven happy to start paying for advice. As any American soldier could have told them would have been the case.

And so we have the advice gap, which was widely feared and predicted, but not so much that anybody actually did anything to combat it

And so we have the advice gap, which was widely feared and predicted, but not so much that anybody actually did anything to combat it. Millions of people who were previously receiving some level of advice now receive none.

There is an argument that this gap is actually a good thing. I can’t quite subscribe to that entirely, but I can see a case for the current situation being better than the state of play before, where people were being sold to by banks and thought they were getting advice. That set-up led to reputational problems suffered undeservingly by all advisers.

As such, I can see that banks retreating from the advice market should be a positive step, but that’s only really the case if something better replaces them.

But nothing did replace them, and the gap has arisen largely because the legislation tackled the symptom rather than the cause. Rather than just take it away, we should have highlighted the shortcomings of the old model.

Whatever the contributing factors, the advice gap is real and has prompted the FSA’s successor, the FCA, to unveil its own Financial Advice Market Review (FAMR). Already dubbed RDR2 (in time for this Christmas’ big Star Wars movie) the review aims to address the issues that remain following RDR1, most notably the advice gap.

What the FAMR needs to acknowledge is that the root of problem before the RDR was not so much the advice these people were or were not getting; it was their understanding of it. This is almost certainly still the root of the problem today.

What we need now is to get people engaged with simple advice. There are various ways to do this. Even if George Osborne’s pledge for free guidance for all began to dissolve as soon as the words were out of his mouth, government agencies like Mas and Pension Wise can deliver a service for free. Indeed, a consultation on the ways those agencies can improve is a key part of the FAMR to which advisers should feel compelled to contribute.

While simple and free advice is a good start, it should naturally lead on to a much more thorough and valuable process for those who would benefit. But it must also educate them that it will cost money.

There are plenty of opportunities to get people in front of an adviser to show the benefits. Then the challenge we have to overcome is how to get people to recognise that they need to pay for it.

I don’t doubt that advisers can demonstrate the value they offer, but there are a lot of people out there who will always resent paying for advice, just as much as the US army still resents paying for doughnuts.