FAMR: A light bulb moment for financial advice?

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FAMR: A light bulb moment for financial advice?
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Statistically, Thomas Edison was a complete failure. By all accounts, he had nearly 300 unsuccessful attempts at inventing the light bulb before his great breakthrough in 1879.

It would be easy to take a similar view of the regulatory framework for financial advice, tainted by an early history of mis-selling, over zealous commission incentives and the dark shadow of fraudsters.

When the Retail Distribution Review arrived, it sought to address the underlying issues, making two significant changes. First, removing any commission bias and, second, raising the bar on adviser standards.

Was the RDR, then, the first light bulb moment for advice?

This of course remains a fairly divisive question, with some saying it was very progressive and others believing it created more problems than it solved.

In the former camp, there is no shortage of ‘new model advisers’ who will extol the virtues of a cleaner, more transparent remuneration model and higher standards required to provide a recommendation to a client. Difficult to argue with.

However, those who believe the latter will claim it reduced the availability of advice - and the services of an adviser - for people who were less able to pay for it.

Quite naturally, many advisers reviewed their client base and redirected much of their work towards those with more to invest; those who were willing to pay fees.

For those who aren’t, the days of advice costs being funded upfront by the provider and recouped over the lifetime of the product have gone.

I suspect few people are aware that model ever existed.

A bigger issue, perhaps, is the fact that we seem to have created an environment where the balance of focus has tipped towards what could go wrong, rather than what could go right.

It feels that for some financial products, the majority of communications relate to the inherent risks, the right to complain, compensation schemes and the various ombudsmen on hand to resolve disputes.

One thing there’s consensus on, though, is the value of advice. Indeed, rightly or wrongly, the main question seems to be how advice is made more widely available.

Enter the Financial Advice Market Review. Another light bulb moment?

It is certainly wide ranging in its objectives, examining:

• the advice gap for those without significant wealth;

• regulatory barriers for those firms providing advice;

• how the market can be given regulatory clarity to innovate and grow;

• the opportunities and challenges of emerging technologies; and

• how to remove consumer barriers to advice.

With a parallel consultation on guidance, the scope to make change is undoubtedly very significant.

It is difficult to pick fault with the FAMR.

I know there are cynics and many will label it as a second attempt at the RDR, but taking it at face value, the paper seems to address all the right issues without shying away from the tough questions.

The thorny issue of ‘safe harbour’ for advisers is one such tough question.

Any regulator will be naturally cautious in granting exemption to recourse on the part of the adviser, effectively passing more responsibility to the customer.

But there are precedents in other countries and there are undoubtedly benefits from adopting such a model.

Another is the idea of a ‘long stop’ on complaints about the advice given.

Again, this is a tricky issue, as it seeks to find a balance between the protection afforded to the customer and the realism of the costs involved for the adviser in running a business.

On the subject of costs, it seems open to considering the levies incurred by advisers and how proportionate they are to the risks.

All of these questions play squarely into the issue of reassessing the balance between the value and risks of advice.

In terms of access to advice, there is a lot in the paper that explores options to improve things. One such area, of course, is technology.

Some say that we’ll have robo-advisers prowling the streets, ready to give monotone recommendations to advice-hungry customers.

We might be at that stage one day. Indeed, it seems likely that at some point almost all jobs will be replaced by technology. Apart from those jobs in technology.

But we’re still some way off that.

More likely, technology will bring ongoing adviser services for clients, complementing existing advice business models. Some of this may be in the management of administration tasks, with more sophisticated models carrying out basic portfolio management.

It seems quite likely that such models will prompt advice needs, generating more frequent contact with the (real) adviser.

Interestingly, there is growing evidence in this area that customers engaging more with technology engage more overall, including a thirst to deal with people. We’ve seen this link starting to form in the use of online retirement tools and subsequent phone contact.

In fact, I can only really justify two minor criticisms of the FAMR paper:

• there’s a fleeting mention of a ‘mortgage’ as an example of a long-term product. I’m not sure that’s true anymore. Perhaps legally, but in marketing terms, they bear all the hallmarks of a short duration purchase: upfront fees and exit charges, centered on a term of about two to three years.

• it starts with the letters, FAMR, on the front cover - a sign of the times and perhaps a poor reflection on our industry, that we can move so quickly to a seemingly accepted, yet slightly awkward, acronym.

Just like the light bulb has evolved since Edison first illuminated us, FAMR is merely another step on this particular journey in an ever changing world.

Ultimately, it won’t be the questions in this review that make the difference, but the answers.

Let us hope they give rise to innovation.

Jamie Jenkins is head of pensions strategy at Standard Life.